Are you single and own an expensive house? You may want to stay that way!

Last week, the US Circuit of Appeals changed the way we treat the mortgage interest deduction for co-borrowers of expensive houses.

The mortgage interest deduction is a key tax deduction for Americans. The rules around the mortgage interest deduction are:

  • You can deduct interest on up to $1.1million of loans
  • The home has to be a qualified residence (i.e. your home)

In 2012, the US Tax Court had ruled that the $1.1million limit was per residence. Meaning, if you had two unmarried people go in together on a really expensive house, you could only deduct interest on the first $1.1million of loans and the rest was non-deductible. (Even at low interest rates, that could equate to $50k or more of deductions that just get thrown away!)

But last week, the 9th Circuit of Appeals reversed* the Tax Court decision and has ruled that the $1.1mm limit is per taxpayer and not per residence. Thus for a house owned by two unmarried people, each person could take an interest deduction for $1.1mm of loans (so, combined, they could deduct the interest on a home that had $2.2 million of mortgages on it). Note: People filing Married Filing Jointly are considered one taxpayer and thus the $1.1million limit still applies to those returns.

Who does this help?

  • Unmarried co-borrowers of expensive homes who had previously lost a large tax deduction

Who does this hurt?

  • The coffers of the U.S. Treasury
  • Possibly wedding planners for the rich?!

As always, before you ditch those wedding plans, please speak to your Enrolled Agent to see how this decision specifically impacts you.

* BRUCE VOSS V. CIR, 12-73257

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