A new homeowner “marriage penalty” in the tax code?
It’s limited to people who have mortgage debt in excess of $1.1M
Does the federal tax code now favor unmarried partners when it comes to deducting mortgage interest on jointly owned houses with super-sized mortgages? Can certain co-owners save big money on taxes by staying single, rather than getting married?
In the wake of a little-publicized move by the IRS earlier this month, the answer appears to be yes for potentially significant numbers of co-owners of houses with jumbo loans.
Under Section 163 of the Internal Revenue Code, taxpayers can write off interest paid on up to $1 million of what the law calls “acquisition indebtedness” and on up to $100,000 of “home equity indebtedness.” You can deduct mortgage interest on both your primary home and a second home up to a combined limit of $1.1 million of debt. If you’re married but filing your taxes separately from your spouse, the law limits the mortgage amounts you can deduct interest against to half of that –$500,000 in acquisition indebtedness and $50,000 in home equity indebtedness.
But what if you’re single, living together with a partner and sharing the mortgage costs? Should you qualify to write off interest paid on up to $1.1 million of mortgage debt apiece, for a total of up to $2.2 million? Could you get a splashier tax benefit if you’re unmarried but co-paying on a high-balance mortgage or mortgages?
In the past, the IRS has said no, when you jointly own one or more residences and you’re not married, the maximum mortgage amount on which you can write off interest is the statutory limit of $1.1 million. When Congress set the $1.1 million ceiling back in the late 1980s, there was no mention of double-dip benefits for unmarried co-owners.
But in 2012, an unmarried couple in California who jointly owned two expensive houses with big mortgages (one in Beverly Hills, a second in Rancho Mirage) challenged the IRS’s interpretation in U.S. Tax Court. They argued that each unmarried partner should be entitled to the full $1.1 million in debt allowed for interest deductions. The combined amount of debt on their two homes exceeded $2.2 million.
The Tax Court disagreed. The partners then appealed that decision to the U.S. Court of Appeals for the Ninth Circuit, which reversed the Tax Court, ruling that the limit should be on a per-taxpayer basis – meaning up to $1.1 million per unmarried co-owner.
That raised the question: How will the IRS handle this issue? Will it restrict it in some way or allow it to take effect nationwide? Now the agency has come out with its answer: We are going to “acquiesce” in The Appellate Court’s decision, the IRS said. We’re going to allow qualified unmarried co-owners to go beyond the $1.1 million mortgage cap – all the way up to a ceiling of $2.2 million.
How big a deal is this? Obviously it’s limited to a relatively elite economic group – people who have mortgage debt in excess of $1.1 million. And it’s limited to co-owners or buyers of expensive homes who choose not to be married but to share the mortgage expenses.
No one knows how many taxpayers across the country fit these descriptions, but some tax experts say it’s a much larger number than you might guess. Susan Berson, a tax attorney in Kansas City, Missouri, says single professionals with super-jumbo mortgages — doctors, lawyers, business executives, investors, recently divorced individuals and others — “should carefully review whether remaining unmarried brings financial benefits of potentially claiming the deductions subject to the increased limit.”
Plus, Berson told me in an interview, she is advising clients to look back at their recent annual tax filings. Some may be able to request refunds.
Anson Asbury, a tax attorney in Atlanta, says professionals in high-cost markets such as Washington D.C., New York, Los Angles, San Francisco, San Diego and pricey neighborhoods elsewhere around the country are likely to be the biggest beneficiaries of the revised IRS policy.
Ed Zollars, a CPA in Phoenix, says in some of these markets “it’s almost trivial to be over” the $1.1 million mortgage debt limit. “In San Francisco and New York it will be easy” for single professionals living together and sharing costs “to double their mortgage interest deductions” under the new policy, saving tens of thousands of dollars a year.
“Where it works,” he said in an interview, “it works a lot.”
That may be so, but isn’t this still another “marriage penalty” in the federal tax code? Sure looks like it.