TaxByte 2016-26

 


IRS Agrees to Grant Unmarried Taxpayers Double Home Mortgage Interest Deduction

IRC § 163(h) allows taxpayers a mortgage interest deduction for “qualified residence interest.” The statutory ceiling for this deduction is set at interest paid on $1,000,000 of acquisition indebtedness and interest paid on $100,000 for home equity indebtedness. Married taxpayers are prevented from “double dipping” under a married filing separate return because IRC § 163(h)(3)(B)(ii) states that married filing separate taxpayers are limited to a deduction for interest paid on $500,000 of acquisition indebtedness and $50,000 of home equity indebtedness.

But what about unmarried couples sharing the same residence? IRS has argued that these couples should not be entitled to a greater deduction than their married counterparts and sought to apportion the maximum mortgage interest deduction among the taxpayers in such cases. In 2012, the Tax Court agreed with this approach in Sophy v. Comr., 138 T.C. 204 (2002). The Tax Court reasoned that Congress did not intend a marriage penalty, but a per-residence limitation. On appeal last summer, the Ninth Circuit reversed this approach. In Voss v. Comr., 796 F.3d 1051 (9th Cir. 2015), the court ruled that the plain language of the statute singled out only married taxpayers for the deduction limitation.

On August 1, 2016, the IRS acquiesced in this decision, stating expressly that it will follow Voss and apply the IRC § 163(h)(2) and IRC § 163(h)(3) limitations on a per-taxpayer basis in the case of unmarried taxpayers.

Consequently, with respect to some home purchases, it really pays to be unmarried.

IRS Action on Decision 2016-02.