Home Mortgage Interest Deduction Doubled For Unmarried Co-owners

The Ninth Circuit Court of Appeals, reversing a Tax Court decision, concluded that the tax law’s limits on the amount of debt eligible for the home mortgage interest deduction ($1 million of mortgage “acquisition” debt and $100,000 of home equity debt) are applied on a per-individual basis, and not a per-residence basis as the IRS has long maintained.Thus, for the unmarried co-owners in the case, their collective limit for the home mortgage interest deduction doubled from a maximum of $1.1 million to a maximum of $2.2 million acquisition and home equity debt.

The Ninth Circuit agreed with the IRS that the debt limit provisions of §163(h)(3) resulted in a marriage penalty but stated that it was not particularly troubled by this, stating that “Congress may very well have good reasons for allowing that result, and, in any event, Congress clearly singled out married couples for specific treatment when it explicitly provided lower debt limits for married couples yet, for whatever reason, did not similarly provide lower debt limits for unmarried co-owners.” Conversely, the dissenting opinion concluded that the majority’s opinion resulted in a windfall to unmarried taxpayers and argued that since the statute was ambiguous the courts should defer to the IRS’s interpretation.

For now, unmarried, co-owner taxpayers in the Ninth Circuit may now safely deduct interest under the per-taxpayer approach. However, unless the IRS acquiesces on the decision, similarly situated taxpayers in other circuits may invite IRS scrutiny if adopting this approach. Accordingly, tax advisors in these other circuits may be called upon to help unmarried, co-owner clients analyze the risks and rewards of deducting interest under the per-taxpayer approach.

Whether this holding will hold up in jurisdictions other than the Ninth Circuit (California and other western states, including Hawaii), and whether it will apply to joint ownership situations for vacation homes, for example, remains to be tested.