Most taxpayers can deduct all the mortgage interest they pay on their principal residence and one other home, but tax law limits may come into play. Generally, your deduction is limited to interest paid on up to $1 million of acquisition debt and up to $100,000 on home equity debt (e.g., interest paid on a home equity line of credit), for a maximum of $1.1 million of debt.
In a case of first impression, the 9th Circuit Court of Appeals reversed the Tax Court’s earlier ruling and concluded that the limits for mortgage interest apply on an individual (per-taxpayer) basis when homes are co-owned by unmarried individuals. As a result, an unmarried couple that owned homes together could write off the interest on a combined total of $2.2 million of mortgage debt. (Voss, CA-9, 8/7/15)
New case: Mr. Voss and Mr. Sophy bought two expensive houses together as joint tenants. They financed each purchase with a mortgage. They also obtained a home equity line of credit on one of the houses. Both Voss and Sophy were jointly and severally liable on the mortgage and home equity debt. They used one house as their principal residence and the other as a second home.
The IRS challenged their mortgage interest deductions. The government claimed that Voss and Sophy, as co-owners of the two homes, could only deduct interest on a combined total of $1.1 million of mortgage debt ($1 million of acquisition debt and $100,000 of home equity debt). In other words, the limits should be applied on a per-residence basis, according to the IRS.
After the Tax Court agreed with the IRS, the taxpayers appealed. In its interpretation of the law and analysis of Congress’ intent, the 9th Circuit Court determined that the interest deduction limits apply on a per-taxpayer basis when a home or homes are co-owned by unmarried individuals.