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Monday, March 23, 2009

IRS Limits Home Mortgage Interest Deduction for Gay/Lesbian Couples

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.

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Comments

The headline needs to be revised to say "for Co-owners". This issue has nothing to do with being gay or not. In high-cost areas it is quite common for friends and colleagues to buy duplexes and triplexes together, and for unmarried couples to buy property together without getting married (due to the marriage penalty, existing marriage, or personal reasons). There are many different types of co-ownership situations. The profile of this issue needs to be raised to alert all affected owners, not just gay couples.

Posted by: AMTbuff | Mar 23, 2009 9:35:19 AM

I agree with the other comment. I don't see how this ruling specifically applies to gay/lesbian couples. Clearly, the Taxpayer and the Co-Owner in the memorandum are both married since the memorandum refers to the $1 million limitation. Also, your conclusion that the memorandum "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" is misleading. If the limitation applied on a per-mortgage basis, a married couple with two residences and two $1 million mortgages could deduct interest on up to $2 million in mortgage debt, which is not the case.

Posted by: Rich | Mar 24, 2009 2:02:17 PM

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Posted by: Alanna | Mar 27, 2009 2:59:23 AM