Back in 2013, I wrote in this blog about some surprising restrictions on the home mortgage interest deduction. In one of the instances noted, two unmarried persons, who together owned two houses that otherwise qualified for this deduction, each claimed the maximum amount of the deduction for the mortgages they had jointly taken out on those homes. The U.S. Tax Court rejected their position, however, ruling that the amount of the deduction should not be limited based on each owner’s share of the mortgages, but should instead be capped, as the IRS urged, based on the total amount of the mortgages taken out against the properties, as a married couple would be treated, thus allowing one-half of the maximum deduction per person.
In spite of this reasoning, a split three-judge panel of the Ninth Circuit Court of Appeals subsequently overturned the U.S. Tax Court’s decision. In its opinion, the majority held that, while the language of the statute in question was ambiguous with regard to this deduction, the owners’ argument that they should each be allowed, as individual taxpayers, to take the maximum amount of the deduction was more consistent with the intent of the law than the IRS’s position to limit the deduction based on the total amount of mortgage debt, as though they were a married couple treated as a joint taxpayer. While acknowledging that the effect of its decision would result in a “marriage penalty,” the majority gave little weight to this issue in view of Congress’s willingness to permit such disparate treatment in other circumstances.
Recently, the IRS announced that it had acquiesced in the Ninth Circuit’s ruling in this matter. Consequently, unmarried co-owners of qualified residences are now entitled to each claim up to the maximum amount of the home mortgage interest deduction, as otherwise permitted, without regard to the total amount of mortgage debt placed against the property, and without fear of challenge by the IRS.
On the one hand, this result is a boon for unmarried co-owners of qualified residences who may now each claim the maximum home mortgage interest deduction. On the other hand, this result further emphasizes the “marriage penalty” that exists under the Internal Revenue Code with regard to married couples having substantial income and assets. Perhaps it may be too much to hope to expect Congress to make sure that obvious ambiguities such as the one at issue here are clarified to prevent confusion in the future.
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