Mortgage interest deduction on more than one residence

"NadCixelsyd" wrote

You are allowed to deduct the mortgage interest on two homes, your primary residence and one other home. So you're ok in deducting the mortgage interest paid on both homes.

True, but also remember that the maximum loan is $1.1M ($1M standard limit, 100k for home equity which if used for buying/building/improving home adds to the limit). So the interest on this amount of loan is deductible. With two loans going on at the same time, you're more likely to be above this limit .

"remove ps" wrote

You must have wealthier clients than I do.

True, but also remember that the maximum loan is $1.1M ($1M standard limit, 100k for home equity which if used for buying/building/improving home adds to the limit). So the interest on this amount of loan is deductible. With two loans going on at the same time, you're more likely to be above this limit. =============== Be careful: The limit appears to be per property, not per taxpayer.

The Tax Court denied per taxpayer limits in favor of a per property limit. In the above case, the total debt at acquisition exceeded $2.2M ($2.7M+). They were unmarried joint tenants. The IRS specifically argued a per residence basis for applying the limit. The Court's analysis starts on page 11 of the decision. The taxpayers each claimed interest based on $1.1M of principal. The IRS prevailed, imposing a single $1.1M limit on the property.

So what this means is that if the owners of the two homes are not married, then the maximum loan on which they can collectively deduct interest is $1.1M, so each gets only 550k, but it could be more or less depending on percentage ownership. Do I have that right?

So what this means is that if the owners of the two homes are not married, then the maximum loan on which they can collectively deduct interest is $1.1M, so each gets only 550k, but it could be more or less depending on percentage ownership. Do I have that right? ============= Yes.

However, it also says that a taxpayer who has two qualified properties can take the interest attributable to a maximum of $2.2M ($1.1M per property) of debt.

Any taxpayer who imposed the limit per taxpayer when having two properties where the combined debt exceeds $1.1M should amend, citing this case as the reason.

you are kidding, right? It says no such thing.

you are kidding, right? It says no such thing. ================ No, I am not. The Tax Court says that the limit is PER PROPERTY, not per taxpayer. A taxpayer with two properties therefore gets the interest expense on a maximum of $2.2M of debt (a maximum of $1.1M on each property). That is CLEAR from the Court's analysis. It is not a joke. It has the support of a citable legal authority.

The only remaining gray area from this ruling would be for a duplex: If two people (not married to each other) buy a duplex (or multiple condo units) and each lives in a unit separate from the the other, does that constitute one residence or two? From the point of view of a residence, they would be separate because the living spaces do not overlap, but from the point of title, the multiple units form a single property. I would venture to say that as the statute is residence driven, not property title driven, that such would be separate residences.

Do the IRS Pubs count as 'verified citations'?

Pub 936 - Home acquisition debt limit. The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately).

A tax court's ruling is fine for that case, but (I believe I learned here) cannot be taken the same as code change.

Publications are not the code - they are just the IRS's opinion how the code should be interpreted. A tax court decision generally trumps an IRS publication, or even an IRS ruling.

Don't quit your day job.

Held: The limitations of I.R.C. sec. 163(h) apply to the aggregate indebtedness on up to two residences, and co-owners not married to each other may not deduct more than a proportionate share of interest on $1.1 million.

What you quote is not part of the court's decision. It's some editor's opinion about what the decisions says.

If you read the entire opinion you will find out the court says explicitly that the limit is per property, not per taxpayer. The apparent reason the taxpayers in that case didn't each get the full deduction is that they each owned two houses, but one person resided in one and the other person resided in the other. If they had both resided in both, it seems apparent that they would have gotten combined deductions of $2.2 million.

I quoted what I quoted because I agree with it after reading the entire opinion.

I completely disagree that the court said, implied, or suggested "A taxpayer with two properties therefore gets the interest expense on a maximum of $2.2M of debt (a maximum of $1.1M on each property)."

And if your re-read the opinion, you will see that it is not true that "one person resided in one and the other person resided in the other." The court recited the facts thusly: "For the years in issue, petitioners used the Beverly Hills house as their principal residence and the Rancho Mirage house as their second residence."

Thus, your conclusion "If they had both resided in both, it seems apparent that they would have gotten combined deductions of $2.2 million" is incorrect.

You and I must have read different decisions both called 138 T.C. No

You have completely misinterpreted the court's decision. All they said was that Congress did not carve out an exception for unmarried co-owners. The law is the same for them as it is for a married couple. The limit is $1.1m on two homes.

When the court concludes with this:

"Although we have reached our conclusion by reviewing the language of the statute, nothing in the legislative history of the section 163(h)(3) indebtedness limitations suggests that Congress had any other intention than what we have determined from an examination of the language. We conclude that the limitations in section 163(h)(3)(B)(ii) and (C)(ii) on the amounts that may be treated as acquisition and home equity indebtedness with respect to a qualified residence are properly applied on a per-residence basis."

They are saying that for this case, where there were TWO RESIDENCES, the allocation by the IRS per residence that limited the total to $1.1M was proper. They did not say that if you owned two residences, the total allowed changes to $2.2M.

The publications are updated according to tax court decisions, especially big ones like this. So while it is theoretically correct that the publication is wrong, practically it is not.

It's possible that both the per property and per taxpayer limits apply. Per property means that on one property the maximum you can deduct is $1.1M across one or more taxpayers. But the maximum of $1.1M per taxpayer across all their properties. I think the court decision is capricious (and wrong) because they wanted to arbitrarily deny tax benefits, and that's why they used contorted logic and that's why it is so hard to understand.

Do the IRS Pubs count as 'verified citations'?

Pub 936 - Home acquisition debt limit. The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately).

A tax court's ruling is fine for that case, but (I believe I learned here) cannot be taken the same as code change. ================ Why not? An Article III Court can invalidate a law -- and that would be a "code change."

The Tax Court has clearly stated that the limit is PER RESIDENCE. Court rulings trump publications.

I quoted what I quoted because I agree with it after reading the entire opinion.

I completely disagree that the court said, implied, or suggested "A taxpayer with two properties therefore gets the interest expense on a maximum of $2.2M of debt (a maximum of $1.1M on each property)."

And if your re-read the opinion, you will see that it is not true that "one person resided in one and the other person resided in the other." The court recited the facts thusly: "For the years in issue, petitioners used the Beverly Hills house as their principal residence and the Rancho Mirage house as their second residence."

Thus, your conclusion "If they had both resided in both, it seems apparent that they would have gotten combined deductions of $2.2 million" is incorrect. ================ Apparently, you don't believe that a person can own a residence without debt.

The Court was examining ONLY ONE of those residences.

You're quoting only the result, but I'm citing how the Court got there -- which is also part of the ruling.

What I quoted was from the TC Decision document itself, not someone else's opinion of it.