Ninth Circuit Liberalizes Mortgage Deductibility For Unmarrieds

The Ninth Circuit Court of Appeals (our jurisdiction) recently reversed the Tax Court and potentially handed unmarried mortgage debtors a significant windfall.

The panel’s decision involved the debt limit provisions – recall that the Internal Revenue Code has long allowed taxpayers to deduct interest on up to $1 million of home acquisition debt and $100,000 of home equity debt.  The case of Voss v. Comm. involved two unmarried co-owners of real property.  Voss and Sophy are domestic partners registered with the State of California.  They co-own two homes as joint tenants – one in Rancho Mirage, California and the other, their primary residence, in Beverly Hills, California.

The total average balance of the two mortgages and line of credit in the tax years in question was about $2.7 million.  Thus, whether the IRC’s debt limit provisions are interpreted as applying per taxpayer (such that Voss and Sophy can deduct interest on up to $2.2 million of debt) or per residence (such that Voss and Sophy can deduct interest on up to $1.1 million of debt) became the issue.

The Code does not contain any language indicating that two single taxpayers who co-own one or two qualified residences are limited to claiming deductions on only their proportionate share of $1.1 million in mortgage debt, which the statute does explicitly provide in the case of married filing separately.  So the taxpayers’ argument in this case hovered on the notion that if Congress had intended to treat single unmarried co-owners of qualified residences in the same way it treats married folk filing separately, it would have drafted the language to do so.

As the Ninth Circuit noted, “Discerning an answer from (section) 163(h) requires considerable effort on our part because the statute is silent as to how the debt limits should apply in co-owner situation.”

An interesting dissent was lodged by Judge Ikuta, who observed that “The IRS’s interpretation is more persuasive than Voss and Sophy’s interpretation, which would result in a windfall to unmarried taxpayers…..There is no basis to infer that Congress intended to allow unmarried co-owners of a qualified residence filing separately to deduct interest on up to $2,2 million of debt, while limiting married co-owners of a qualified residence to deduct interest on only half that…..A more logical inference is that the deduction was aimed at promoting home ownership for ordinary folks, not to help wealthy individuals purchase mansions that are encumbered with more than $1.1 million of debt.”

So be it!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

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