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