Ninth Circuit holds mortgage-interest deduction applies on a per-taxpayer basis

Ninth Circuit holds mortgage-interest deduction applies on a per-taxpayer basis

Unmarried taxpayers who co-own a residence can each deduct interest payments on home-acquisition and home-equity debt up to the $1.1 million limit in Sec. 163(h)(3), the Ninth Circuit Court of Appeals held on Friday, reversing a Tax Court decision (Voss, No. 12-73257 (9th Cir. 8/7/2015), rev’g Sophy, 138 T.C. 204 (2012)).

Bruce Voss and Charles Sophy, domestic partners under California law, co-own two California residences, one in Rancho Mirage purchased in 2000, with a $500,000 mortgage on it, and the second in Beverly Hills, which they purchased in 2002, with a $2 million mortgage and a $300,000 home-equity line of credit.

The taxpayers filed separate federal income tax returns for 2006 and 2007, claiming separate amounts of mortgage-interest indebtedness up to the $1.1 million limit. (Sec. 163(h)(3) allows taxpayers to deduct interest on up to $1 million in home-acquisition debt and up to $100,000 of home-equity debt.)

The IRS disallowed a portion of the deductions for mortgage interest on each taxpayer’s return to the extent they each resulted from indebtedness that together exceeded the $1.1 million limitation, determining that the taxpayers were jointly subject to the Sec. 163(h)(3) limit.

Voss and Sophy each filed a Tax Court petition, and the two cases were consolidated. The Tax Court upheld the IRS’s deficiency, explaining that the $1.1 million limitation should be applied on a per-residence basis, not a per-taxpayer basis (see here for a discussion of the earlier case).

On appeal, the Ninth Circuit acknowledged that the statute is silent about how the debt limit applies when there are unmarried co-owners of property, but it rejected the Tax Court’s analysis nonetheless. It noted that if Congress wanted the debt limits to apply on a per-residence basis, it could have included that language, as it did for the first-time homebuyer credit, which requires allocation of the $8,000 credit if the residence is purchased by unmarried taxpayers. Read more on the Journal of Accountancy.