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Mortgage Deduction Limits: Per Residence, Not Per Person

Last week brought bad news for wealthy unmarried couples who own homes together. The U.S. Tax Court held that the $1.1 million limit on the mortgage interest deduction must be applied per residence, not per taxpayer, even where the co-owners are unmarried and file separate tax returns.

Home mortgage interest for a loan or loans totaling $1 million is deductible as an itemized deduction. Interest on a home equity loan — for a primary or second home — of up to $100,000 is also deductible. Thus, you can deduct the interest on a total of $1.1 million in home loans each year. If you borrow more than that, the additional interest is not deductible.

If a married couple own a home or homes and file a joint return, the $1.1 million limit applies to them both together. If they file separately, the limit is cut in half for each. So, either way, married couples are limited to deducting the interest on only $1.1 million.

But what about when unmarried couples purchase homes together and file separate returns — does the limit apply to them both together or to each separately?

Charles and Bruce, an unmarried couple, purchased a principal residence in Beverly Hills, Calif., and a second home in Rancho Mirage, Calif., as joint tenants. They each filed separate tax returns. Their total mortgage debt was more than $2.7 million.

Charles and Bruce each deducted on their separate returns the interest on $1.1 million of their loans. Thus, together they deducted the interest on $2.2 million.

The Internal Revenue Service said that Charles and Bruce together could deduct only the interest on $1.1 million. The couple argued that because they were not married, the limitations on married taxpayers don’t apply to them.

Instead, they claimed that when unmarried people co-own a house the $1.1 million limit applies to each individual taxpayer.

The Tax Court sided with the IRS. It held that the $1.1 million limit applies per residence, not per taxpayer, even where a home is co-owned by unmarried taxpayers.

Thus, even though they were unmarried and filed separate returns, Charles and Bruce could together deduct the interest on only $1.1 million of their mortgage debt.

Instead of deducting more than $76,000 in mortgage interest on their individual returns, they could each deduct only $38,000.

Unmarried people who purchase expensive homes should keep this limitation in mind.