Mortgage Interest Deduction Doubles for Unmarried Cohabitants

Mortgage Interest Deduction Doubles for Unmarried Cohabitants

Real Estate Tax Deductions – Unmarried Cohabitants

Voss v. Comm’r, __ F.3d ___ (9th Cir. 2015)

Bruce Voss and Charles Sophy were co-owners of real property, for which each of them claimed home mortgage interest deductions in 2006 and 2007.  Voss and Sophy were registered domestic partners in California, but unmarried for federal tax purposes.  They owned two homes as joint tenants: one in Beverly Hills and one in Rancho Mirage.  The latter was encumbered by a $500,000 mortgage loan for which they were jointly and severally liable; and the Beverly Hills home was encumbered by a mortgage loan of $2 million and a home equity loan of $300,000.

Under IRC § 163(h)(3), the home mortgage interest deduction is limited to the interest on the first $1 million of acquisition debt, plus up to $100,000 for home equity debt.  Married taxpayers who file jointly are limited to $1,000,000 and $100,000; while married taxpayers who file separately are each limited to $500,000 and $50,000. IRC § 163(h)(3)(B)(ii) and (C)(ii).

In 2006 and 2007, both Voss and Sophy made payments toward the mortgage loans, as it was stipulated that Voss paid mortgage interest of $85,962 in 2006 and $76,635.08 in 2007; and Sophy paid interest of $94,698 in 2006 and $99,901 in 2007.  In 2006, both men slightly overstated their mortgage interest deductions (because of payments that were made on 12/31/05), and in 2007 both men understated their deductions.

When audited, both men received deficiency notices because their interest deductions collectively exceeded the interest on the first $1 million of acquisition debt. The IRS was prepared to allow just slightly more than 40% of the deductions that were claimed by each.  In a Tax Court decision, 138 T.C. 204 (2012), the Tax Court ruled in favor of the IRS, holding that unmarried co-owners were limited in the same fashion as married taxpayers filing separately.

On appeal, the Ninth Circuit Court of Appeals examined the language of §163(h)(3).  The Tax Court had held that the statutory definition of “acquisition indebtedness” requires the mortgage interest limitation to be applied on “per property” basis. The Ninth Circuit court disagreed, after examining the legislative history and interpreting the language of the law.  The statute itself is completely silent on the issue, except as regards married taxpayers who file separately.  Since the exception to the rule focuses upon the taxpayers’ status, and not the property, the Ninth Circuit reasoned that the limitation also applies to each taxpayer, and not to each property.

A commentator who wrote about this case (Lee Zimet, CPA, J.D.,LLM) remarked: “The Court of Appeals opinion will only apply to those taxpayers living in the Ninth Circuit – the Pacific Coast – while Tax Court decision will continue to apply to those living outside the Ninth Circuit.”  If that is true, it is curious that the Tax Court decision that was reversed should remain precedential everywhere but the West Coast.