Why staying unmarried is great for your clients

by Michael Mata03 Aug 2016
Religious convictions aside, there are many reasons why co-habiting couples might choose to walk down the aisle or avoid marriage altogether. Late last week, the IRS gave unmarried couples who co-own a home a financial impetus to stay unmarried: they’ll now enjoy double the mortgage interest deduction available to married taxpayers.

In AOD 2016-02, the IRS submitted without protest to the Ninth Circuit’s decision in Sophy v. Commissioner, in which the appeals court overturned a Tax Court decision by allowing a unmarried and co-habiting same-sex couple to each deduct the mortgage interest on $1.1 million of acquisition and home equity debt. The Ninth Circuit further determined that the mortgage interest limitation is meant to apply on a per-taxpayer, rather than a per-residence, basis. The following AOD (Action on Decision) issued by the IRS confirms that the Service will follow this treatment.

Section 163(h)(3) permits a deduction for qualified residence interest up to $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. Hence, if your mortgage balance (or balances, since the mortgage interest deduction is allowed on up to two homes) exceeds the statutory limitations, the mortgage interest deduction is limited to the amount applicable to only $1,100,000 worth of debt.

An unmarried couple who own a home as joint tenants (assuming that the total acquisition mortgage debt is $2 million and the total home equity loan is $200,000, making the total debt $2,200,000) would each pay interest only on their $1,100,000 share of the debt. Under the new ruling, their mortgage deduction is limited because the total debt on the property exceeds the $1,100,000 statutory limitation.

Assuming they each paid $70,000 in interest, each limitation would be determined as follows:

$70,000 * $1,100,000 (statutory limitation)/$2,200,000 (total mortgage balance) = $35,000


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