Academic journal article Journal of Accountancy

Unmarried Co-Owners Must Allocate Mortgage Interest Limits

Academic journal article Journal of Accountancy

Unmarried Co-Owners Must Allocate Mortgage Interest Limits

Article excerpt

The Tax Court held that, in calculating qualified residence interest, unmarried taxpayers must apply the debt limits for home acquisition and home equity loans to their total joint indebtedness on qualified residences rather than to each of their shares of the indebtedness.

Sec. 163(h)(3)(A) permits taxpayers to deduct interest paid or accrued during a tax year on acquisition indebtedness or home equity indebtedness for a qualified residence, which is defined by Sec. 163(h)(4)(A)(i) as the taxpayer's principal residence and one other home used by the taxpayer as a residence under rules at Sec. 280A(d)(1). Interest may be deducted only on the first $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. In 2009, the IRS Office of Chief Counsel issued Chief Counsel Advice (CCA) 200911007, which stated that when homes are jointly owned by unmarried taxpayers, the limits of Sec. 163(h)(3) should be applied on a per-residence basis, not a per-taxpayer basis.

Charles J. Sophy and Bruce H. Voss purchased a home in Rancho Mirage, Calif., in 2000 and a home in Beverly Hills, Calif., in 2002 as joint tenants, financing each purchase with a mortgage secured by the property The taxpayers subsequently refinanced both mortgages and obtained a home equity line of credit on the Beverly Hills property The total average balance for all of the mortgages was $2,703,568 in 2006 and $2,669,136 in 2007. Sophy and Voss each received notices of deficiency on their 2006 and 2007 individual tax returns when the IRS, using the method of CCA 200911007, disallowed portions of their interest deductions because each taxpayer had used $1 million and $100,000 limitations to compute his interest deductions for both years. …

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