IRS Acquiesces to Per-Taxpayer Interpretation of Mortgage Interest Deduction Limits

The IRS announced today that it will “acquiesce” to the Court of Appeals for the Ninth Circuit decision that the Federal income tax home mortgage interest deduction limitations apply individually to each co-owner of a qualified residence if they are not married to each other, and not to the residence itself.

This means that each co-owner, if not married to each other, is entitled to a maximum $1.1 million indebtedness limitation for mortgage and home equity interest on his or her Federal income tax return.

The original case involved domestic partners who co-owned a primary residence and a vacation home as joint tenants. They were joint and severally liable for the mortgage and home equity indebtedness. After audit, the Internal Revenue Service (IRS) determined that the two co-owners were limited to a single maximum $1.1 million indebtedness limitation apportioned between them. The taxpayers filed petitions in the US Tax Court, which decided in favor of the IRS. The taxpayers then appealed to the Court of Appeals, which decided in their favor.

In its announcement, the IRS advised that it acquiesces to the Court’s decision. “Acquiescence” by the IRS means that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. However, “acquiescence” indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions.

This decision will allow individuals who own property together, including business partners, siblings, unmarried couples and others, to double (or more, depending on the number of owners) their mortgage interest deduction when the indebtedness is equal to or in excess of $2.2 million, i.e., each co-owner will be able to deduct up to $1.1 million of mortgage interest ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness).

The announcement by the IRS is a preview of the Service’s position that will be released in the near future in a formal Action on Decision (AOD). It is the policy of the Internal Revenue Service to announce whether it will follow the holdings in certain cases via an AOD. Unlike a Treasury Regulation or a Revenue Ruling, an AOD is not an affirmative Statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent. Recommendations in the AOD may be superseded by new legislation, regulations, rulings, cases, or subsequent Actions on Decisions.

Contact your Marcum tax professional to discuss how this new IRS position may affect your individual tax situation.

Marcum is the thought leader in the specialty area of tax compliance and consulting services for high net worth modern families, same-sex couples and LGBT individuals. The Firm’s specialists have over 20 years of experience navigating the complex, hyper-local and shifting tax landscape for the modern family in America. In 2012, Marcum became the first national accounting firm to establish a tax and estate planning practice dedicated to the complex rules faced by people who don’t fit traditional definitions. Should you have any questions on the mortgage interest rules, contact your Marcum Tax Professional.