The Ninth Circuit Court of Appeals overturned a Tax Court case which had disallowed two California domestic partners from each deducting mortgage interest up to the $1.1 million limit. The Tax Court held that the $1.1 million mortgage interest deduction limitation applied on a per residence basis. Noting that the statute was ambiguous as to whether the limit should be applied on a per residence versus a per taxpayer basis, the Ninth Circuit looked at the Code Section related to the first time homebuyer credit, which specifically applies on a per residence basis. The appellate court reasoned that if Congress had meant for the mortgage interest limitation to apply on a per residence basis, they would have written the section in that manner. For our Arizona readers out there, we are in the Ninth Circuit, so this applies to us. I would not be surprised if the IRS challenges this interpretation in other circuits or presses for a change to the law. In the interim, however, this is something to consider.
This case is interesting because it creates another statutory incentive not to get married. Unmarried taxpayers can essentially benefit from mortgage interest deductions for $2.2 million of debt while a married couple in the same home could only deduct half as much (as pointed out in a dissenting opinion). Of course, after years of living in a nice home, the unmarried taxpayers will want to get married prior to one of them passing away so as to take advantage of the benefits of being married from an estate tax point of view, but that is a subject for another day.
By Bradley Dimond, CPA