In a recent decision, the 9th Circuit Court of Appeals expanded the mortgage interest deduction, effectively doubling the deduction limits for unmarried co-owners. The decision has important implications for individuals with very high mortgage debt, and also for those who take out second mortgages on their homes. Read on to find out more.
The tax laws (known as the Internal Revenue Code) allow individuals to deduct the interest they pay on the mortgage on their home. This is commonly known as the mortgage interest deduction. What is not commonly known is that individuals can also deduct the mortgage interest on a second home. In addition, individuals can deduct interest paid on a home equity line of credit (HELOC), both on their primary home and a second home. If two or more unmarried individuals own a single home, they can apportion the interest deduction among themselves. There is, however, a limit on how much interest can be deducted. A deduction can be claimed only for interest on $1,000,000 of acquisition indebtedness (the amount borrowed to buy a home), and $100,000 of home equity indebtedness. So, for example, if you have a $200,000 HELOC, you can only deduct half of the interest you pay on it. These limitations apply to single individuals. These same limitations also apply to married couples.
But, what happens if a home is owned by two people, who both reside in it, and are not married? The IRS had taken the position that unmarried co-owners, together, are subject to the same limits as individuals. If the IRS’s position had prevailed, then two unmarried individuals who had a $200,000 HELOC could together only claim a deduction for half the interest paid. However, the court disagreed with the IRS, and ruled that the limits applied separately to each individual owner. This means that in our example with two owners and a $200,000 HELOC, each owner could deduct interest on $100,000 of the debt, and together they can deduct the full interest paid.
How significant is this decision for Arizonans? The decision will have the most benefit to those who have mortgages between one million and two million dollars. Because most mortgages in Arizona are less than $1,000,000, most Arizonans will not be able to take advantage of this “acquisition indebtedness” deduction. However, the expansion of the home equity indebtedness deduction will likely be more significant, because many people refinance their homes and take out large HELOC loans.
The case is Voss v. Commissioner of Internal Revenue, 796 F.3d 1051 (9th Cir. 2015).
The above information is provided for general purposes only and does not constitute legal advice or create an attorney-client relationship, If you need legal advice for your specific situation, you should contact a qualified attorney in your area.