Monday, March 23, 2009
The TaxProf email discussion group has been abuzz lately about newly issued Chief Counsel Advisory 0911007 (Nov. 24, 2008; released Mar. 13, 2009), which held that the $1 million limitation on the deduction of mortgage interest on acquisition indebtedness under § 163(h)(3)(B) applies on a per-mortgage basis, rather than on a per-taxpayer basis. The ruling has enormous implications for both gay/lesbian and heterosexual couples who co-own their homes, particularly in states with high housing prices like California. Prior to the ruling, tax folks assumed that unmarried co-owners could each deduct mortgage interest on $1 million of acquisition indebtedness, thus permitting deduction of interest on one $2 million mortgage. The ruling appears contrary to the statute, as § 163(h)(4)(A)(i)(I) defines a qualified residence by reference to § 121, and Reg. § 1.121-2(a)(2) applies the $250,000 exclusion on a per-taxpayer basis in a co-owner situation.