Shacking up? Business partners? Your deduction is double


Divorce attorneys, CPA’s, realty agents and the vacation home folks at Airbnb must be just giddy about the good folks at the Internal Revenue Service.

Why? Because this week the IRS acquiesced on last year’s 9th Circuit Court of Appeals decision in Voss v. Commissioner that reversed a tax court ruling.

Now, unmarried borrowers can get up to double the mortgage interest deduction that married joint tax filers receive.

Previously, IRS regulations generally allowed for any unmarried taxpayer as well as any married couple filing joint tax returns to equally deduct mortgage interest up to $1 million on a first trust deed for their primary residence and one vacation home.

In addition, both the unmarried tax payer and the married couple were allowed up to $100,000 in mortgage interest deduction for a home equity line of credit.

Married couples filing separately were each allowed up to $500,000 on the first mortgage and $50,000 on the HELOC.

With the 9th Circuit ruling and the IRS effectively standing down, unmarried taxpayers (lovers, brothers, sisters, friends, business partners) who want to buy ginormously expensive homes together are each allowed up to $1.1 million in total mortgage interest deductions. That is $1 million on the first trust deed and $100,000 on the HELOC.

“It’s huge,” said Warren Hennagin, CPA and managing partner at Gelman LLP in Santa Ana.

To illustrate, Hennagin offers a married couple with a $2 million first trust deed at a 4 percent interest rate. They will pay $80,000 in interest during the first year. But they only get to deduct interest paid on $1 million in debt, or $40,000.

Assuming the biggest bad boy federal tax rate of 40 percent, their tax savings is $16,000.

Now take an unmarried couple who deduct the full $80,000 of mortgage interest. Their total tax savings is $32,000.

That’s a big marriage penalty.

Prior to this new IRS acquiesce, the unmarried couple would each be deducting based upon a $1 million mortgage amount because the second million was disallowed.

Now, let’s get really creative.

Take five successful, single business people who are old college buddies. They could buy the Taj Mahal for say $10 million. Slap on a $5 million dollar mortgage and each participate in the maximum first trust deed tax benefits, assuming they have equal shares of ownership and payment contributions.

For unmarried people in the enviable position of affording such large mortgages, it’s a good ruling, said Emily Kingston, attorney at San Francisco-based Sideman Bancroft LLP, the firm that represented plaintiffs Bruce Voss and Charles Sophy before the 9th Circuit Court of Appeals.

If you are lucky enough to already have fit into this mother lode of additional mortgage interest deductions, you can amend your federal tax returns for the last three years and your California returns going back up to four years, Kingston said.

According to the IRS, you can deduct mortgage interest on vacation homes that you also rent out. Hello Airbnb!

Always consult your tax preparer for the exact details.

If you have questions or comments, please contact Jeff Lazerson by clicking here.

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Jeff Lazerson - Mortgage Columnist since 2011