Apr
11

Tax Day is Approaching – IRS Limits Interest Deduction for Non-Married Couples

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The IRS recently ruled may interest many taxpayers who co-own property with a person who is not their spouse.

Basics of the home mortgage interest deduction

  • Taxpayers who itemize deductions on Schedule A can include interest paid on mortgages with certain limitations:
    • Only interest paid on a loan secured by a principal residence and second home is deductible
    • Only deduct interest on loans for which they are legally liable, so paying someone else’s mortgage doesn’t count.

Once the above conditions are met, the following applies:

  • Only interest on the first $1,000,000 of debt for first and second residences combined can be deducted, for Single or Married filing Jointly and married filing separately, the limit is reduced to $500,000 each.
  • Only the interest on the first $100,000 of home equity loan debt.
  • In this example, an unmarried taxpayer with a mortgage and home equity line of credit could deduct the interest on $1,100,000 in total.

Recently the IRS ruled that, for an unmarried couple who jointly owns the home together the $1,100,000 limit applies to the residence, not the taxpayer.

  • One or two homes which are the principal and second homes cannot provide more than a home mortgage interest credit on $1.1 million of debt total regardless of how many people own the homes.
  • Once the $1.1 million of interest deduction is used from the first and second home, no further interest deduction can be claimed.
  • In this example John and Jane own two homes jointly but are not married.  Home one has a mortgage debt of $1.5 million and home two has a mortgage debt of $1 million, with no home equity line of credit on either property.  According to the ruling, John and Jane cannot together claim interest on more than $1 million of total mortgage debt.  However if John owned home one and Jane owned property two, then each taxpayer could claim the full limit providing they were otherwise eligible.

 Tax planning becomes very important in this situation.  Seeking the advice of a qualified tax professional can be extremely helpful prior to purchasing a home to be sure the structure permits maximum deductions.

 

Based on blog article by Jerry M Feeney, Residential Real Estate Attorney.  Information in this article is to be used for informational purposes only, and not to be considered legal, tax or financial advice by the Real Estate Geezer.

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