New mortgage interest deduction limit for unmarried co-owners

Many taxpayers take advantage of the itemized mortgage interest tax deduction on the mortgage interest Froehling Anderson High Net Worth Individualspaid in a calendar year on their first and second residences.  Until recently, the amount of interest a taxpayer can deduct was limited to $1.1M of mortgage balances.  For example, a taxpayer that has two homes with mortgages totaling $2M cannot deduct all of the interest paid on the mortgage.

New ruling:
The $1.1M limitation is now on a per-individual basis and not a per-residence basis after the Ninth Circuit Court reversed a Tax Court decision. The IRS has announced they will acquiesce with the Ninth Circuit Court’s decision.

What does this mean?
Let’s say two unmarried individuals (Taxpayer A and B) purchase two homes and use one as their primary residence and the second as a vacation home.  Each home has a $1.1M mortgage against it for a total of $2.2M of mortgage debt.  Prior to this decision, the mortgage interest paid on both homes would have been limited to 50% of the total paid ($1.1M limitation divided by $2.2M of total debt).  The IRS will now allow each taxpayer to use $1.1M of debt and all of the mortgage interest will be allowable.  Taxpayer A can take all of the interest on the first residence and Taxpayer B can take all of the mortgage interest on the second residence.

If Taxpayer A and B are married, they would not qualify for the deduction, adding to the so-called “marriage penalty”. This is yet another planning opportunity for high net worth individuals. If you have any questions about potential planning opportunities, contact Froehling Anderson or your CPA to discuss your options.


About the Author: Wade Christensen

Wade Christensen, CPA is a tax partner at Froehling Anderson specializing in working with businesses, professional athletes, and high net worth individuals.