In Christine Bowers’ latest article published in Bloomberg BNA, she covers the latest tax break for unmarried couples who own a home together. In a recent case in the U.S. Court of Appeals for the Ninth Circuit reversed the Tax Court “and held that in the case of unmarried co-owners of a qualified residence, the debt limit provisions apply on a per-taxpayer basis rather than on a per-residence basis in determining the amount of the allowable interest deduction under §163(h).”

The Internal Revenue Code provides that in calculating the allowable home mortgage interest deduction for each tax year, no more than $1,000,000 of acquisition indebtedness and $100,000 of home equity indebtedness may be taken into account, but these debt limits are reduced to “$500,000 in the case of a married individual filing a separate return" and “$50,000 in the case of a separate return by a married individual”. The taxpayers in this case were un-married co-owners of a principal residence and a second home with acquisition and home equity indebtedness that exceeded the statutory limits. Based on the Ninth Circuit’s interpretation of the statute, it concluded that each of the taxpayers could apply the debt limitations separately, resulting in total deductions far in excess of what would have been allowed if the taxpayers had been married.

The Ninth Circuit agreed with the IRS that the debt limit provisions of §163(h)(3) resulted in a marriage penalty but that it was not particularly troubled by this, stating that "Congress may very well have good reasons for allowing that result, and, in any event, Congress clearly singled out married couples for specific treatment when it explicitly provided lower debt limits for married couples yet, for whatever reason, did not similarly provide lower debt limits for unmarried co-owners." Conversely, the dissenting opinion concluded that the majority's opinion resulted in a windfall to unmarried taxpayers and argued that since the statute was ambiguous the courts should defer to the IRS's interpretation.

“For now, unmarried, co-owner taxpayers in the Ninth Circuit may now safely deduct interest under the per-taxpayer approach,” Bowers writes, but notes that the IRS acquiesces in the decision may invite IRS scrutiny if such approach is adopted. 

Read the full article – “A Large Tax Break for Unmarried Couples Who Own a Home Together” (Bloomberg BNA, October 19, 2015)