Irs allows mortgage deduction for unmarried couples

A year ago, the U.S. Court of Appeals for the Ninth Circuit ruled that two unmarried co-owners of a home could each claim a deduction for the mortgage interest they paid on the home. The IRS said this week that it will no longer try to fight that decision. This concession will have significant implications for individual taxpayers who also own their homes.

The decision

The decision stems from a case in which Bruce Voss and Charles Sophy, who own a pair of homes, contend that each should be able to deduct interest on mortgages. The IRS objected and the tax court also ruled against them. They then took their case to the Court of Appeals for the 9. Court of Appeals, where the judges ruled in a two-to-one decision, "Although the statute is silent on unmarried co-owners, we infer from the treatment of married persons who The debt limits of section 163(h)(3) apply to unmarried co-owners on a tax basis. "(For more information, see Tax Deductions for Mortgage Interest .)

Under current tax law, taxpayers can deduct interest paid on a mortgage of up to $1 million and equity lines of credit of up to $100,000 for both their primary residence and a second home. Mortgage limit for married taxpayers filing separately is $550, 000. For all home loans exceeding $1. 1 million, taxpayers can only deduct an amount equal to the percentage ratio of the debt limit divided by the actual amount of the debt.

The IRS said it would accept the court's decision, which means it will now settle all similar cases with similar circumstances. It did not provide any information that could be construed as approval or disapproval of the court's decision, but simply said they would not take the matter further.

Many tax professionals consider this ruling a boon to individual taxpayers who own their homes jointly. Tax attorney Roger Russell, a senior editor at Accounting Today, wrote, "The IRS's decision to agree opens the door for unmarried couples outside the 9. Circuit to claim deductions under the increased limit, and adds an additional element. the marriage according to the codex. "(For more information, see: Calculating Mortgage Interest Tax Withholding Co .)

Other tax practitioners reiterated his opinion. Ed Zollars, a certified public accountant, wrote the following on the Current Tax Developments website: "Advisors with taxpayers who applied a per-residence limitation to mortgage interest in prior years should consider having those taxpayers make claims for refunds in prior years. Restrictions remain open."

Allegation

Individual taxpayers who own one or more of their homes jointly with another person should consider claiming additional mortgage interest and receiving an additional refund. You can do this for the last three years of the return under current tax law, and this can be a significant opportunity for those who own large homes with large mortgage balances. Home mortgage interest is often the most important deduction that allows many taxpayers to itemize their deductions, so those who previously could not deduct their interest because they had to share that amount with their co-owner are now entitled to itemize it.

The Bottom Line

Financial advisors with clients who are unmarried co-owners of a home need to review their tax returns to determine if refunds are available. Those who uncover opportunities in this area can offer added value to their clients.