A Mortgage Case
As was discussed in the last posting was on the mortgage interest tax deduction, and what were the limitations, and also that one could claim more than one residence for the mortgage interest deduction. However, what happens if two individuals (not a married couple), who co-own a residence, how do the mortgage interests limitation of $1,000,000/$100,000 limitations (as discussed before) apply in such a fact pattern?
Well the US Court of Appeals, Ninth Circuit, had this fact pattern before them (Voss vs. Commissioner of Internal Revenue dated August 7, 2015). The case was that in 2006 & 2007 two individuals, who were not a married couple (and couldnt be because the couple was a same sex couple and was barred from filing a joint tax return due to the federal Defense of Marriage Act of 1996, since declared unconstitutional back on June 26, 2013), co-owned two residences (and was jointly and servable liable on the two mortgages), which had a mortgage principal balances of $2.7 million for 2006 and 2007, way above the $1,000,000 /$100,000 limitations. So does the question for the Ninth Circuit was that shall $1,000,000 /$100,000 limitations apply per individual/taxpayer, thereby the limitations for these two individuals combined would be $2,000,000 /$200,000 (i.e. $1,000,000 /$100,000 for each individual), or only at per residence basis, to wit the two individuals would be subject to a single $1,000,000 /$100,000, as if they were a married couple, which both the IRS and the federal Tax Court below both held.
This case was indeed of first impression (or first time of a type of a case) that the Ninth Circuit had to look into, so the Ninth Circuit looked the federal tax code and despite its apparent vagueness, it did find that the $1,000,000 /$100,000 limitations do apply on an individual basis, than a residential basis, because the Ninth Circuit compared to a limitations for a married couple, but filing separately to only $500,000/$50,000 (another reason to avoid the married, filing separately status), as the only dollar exception to the regular $1,000,000 /$100,000 limitations. Another example of the tax code was drafted for such a case was that the old First Time Homebuyer tax credit (now defunct) was generally $8,000, but for married filing separately it is only $4,000. Finally, the Ninth Circuit also looked at the capital loss limitation, which is $3,000 for a taxpayer, but only $1,500 for married filing separately. Thusly, it appears, according to the Ninth Circuit:
The purpose of these provisions is obvious. In each provision, each taxpayer gets some tax benefita credit, an exclusion up to some limit, allowable losses up to some limit, or, here, a deduction on interest on home debt up to some limit. Congress, knowing that joint filers are treated as a single taxpayer [Emphasis Added] and that separate filers are treated as two separate taxpayers, wants to ensure that the separately filing spouses don’t get double the benefit that jointly filing couples get. And so, in each of these provisions, Congress provides that separately filing spouses each get half the benefit. The intent of these provisions is not to prevent separately filing spouses from allocating the benefit; it is to ensure that the separately filing spouses don’t get double the credit, the exclusion, the losses, or the debt limit that the jointly filing couple gets.
Thusly, it appears for individuals residing in states that consist of the Ninth Circuit (and that are including California) who co-own a residential home would apply the 1,000,000 /$100,000 limitations on a per taxpayer basis, rather than on a residential basis as the IRS and the Tax Court would prefer.
So, if you do co-own a residence with someone (and are not a married couple), contact us, we would be more than to see if this case would apply to you facts and circumsnstances.