Paul L. Caron

Monday, August 10, 2015

Ninth Circuit Gives Unmarried Couples Double The Mortgage Interest Deduction Available To Married Couples

Tax Court Logo 2A split Ninth Circuit panel on Friday reversed the Tax Court and held, contrary to the IRS's position, that the § 163(h)(3) limitations on the deductibility of mortgage interest ($1 million of acquisition indebtedness plus $100,000 of home equity indebtedness) are applied on a per-taxpayer basis (for a total of $2.2 of mortgage debt), as contended by celebrity psychiatrist Charles Sophy and his domestic partner, Bruce Voss, who owned homes in Beverly Hills and Rancho Mirage, California, as joint tenants.  Voss v. Commissioner, Nos. 12-73257 & 12-73261 (Aug. 7, 2015). (The Tax Court had upheld the IRS's position that §163(h)(3) applies on a per-residence basis (and thus limited to $1.1 of mortgage debt.  Sophy v. Commissioner, 138 T.C. 204 (2012).)

Judge Ikuta dissented:

Today the majority interprets the Tax Code to allow unmarried taxpayers who buy an expensive residence together to deduct twice the amount of interest paid on the debt secured by their residence than spouses would be allowed to deduct. While the language of the relevant statute is ambiguous, the IRS has offered an interpretation that limits unmarried taxpayers in this situation to deducting the same amount as married taxpayers filing jointly. Because we should defer to this reasonable interpretation by the IRS, I dissent.

(Hat Tip: Pat Cain.)  Prior TaxProf Blog coverage:

Update #1:  From Howard Bashman's How Appealing blog:  "Because a judge sitting by designation from another circuit provided the decisive vote on the three-judge panel, the case could have a better than average chance of attaining rehearing en banc should the IRS opt to pursue that remedy."

Update #2:  San Francisco Chronicle, Tax Ruling a Win for Unmarried People Who Own a Home Together

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Par for the course. A co-worker of mine recently received a promotion. The promotion puts him in the position of supervising his live-in girlfriend. His excuse regarding why this is not a conflict of interest is that they aren't married. It's an excuse the company appears to have bought.

The reasons to marry are shrinking rapidly. I regard that as a bad thing.

Posted by: WJ | Aug 13, 2015 12:02:42 PM

According to the law, this is correct. Sadly, married people cannot obtain the same benefit and I would advise gay couples that they would be stupid to get married because the tax benefits are enormous.

Posted by: DefendUSA | Aug 13, 2015 4:49:03 AM

Clearly the benefits to the nation as a whole are maximized by limiting the mortgage interest deduction to heterosexual married couples with children. Arguably, anyone else to takes the deduction creates a net loss to the nation.

If you can't abolish it, sharply limit it.

Posted by: Micha Elyi | Aug 10, 2015 3:14:24 PM

In my view, the Ninth Circuit is correct. The question is whether the cap is per taxpayer or per residence. The plain language of the statute supports the former (per taxpayer). In addition, a per residence interpretation creates horrible interpretive difficulties in nonstandard situations (e.g., A and B own Blackacre jointly, and A owns Whiteacre solely, both as qualified residences). It also creates horrible enforcement difficulties (e.g., how does A know what B claimed; and how does the IRS on examination of A's return know to look at B's return?).

The IRS's evident desire not to let unmarried couples get away with a tax benefit not available to married couples is misplaced. The Code is chock-full of situations in which Congress has deliberately allowed unmarried couples to get away with tax benefits denied to married couples. There is no obvious reason to make IRC 163(h)(3)(C)(ii) an exception to this general rule.

Posted by: Theodore Seto | Aug 10, 2015 12:30:21 PM

"Well, the clear solution is for the IRS to read this ambiguous statute so as to treat married taxpayers as two individuals for purposes of computing the deduction."

Aren't they? Or if Joint filers are not considered individual taxpayers, could they not file separately?

Posted by: Formerly known as Skeptic | Aug 10, 2015 9:13:27 AM

Cleary another reason to get rid of all these economic distorting deductions and move to a two tier flat tax system.

Posted by: bobbymike | Aug 10, 2015 8:49:26 AM

Well, the clear solution is for the IRS to read this ambiguous statute so as to treat married taxpayers as two individuals for purposes of computing the deduction. And who would ever have standing to object in court? Basic Obama Dodgeball.

Posted by: Righty Feep | Aug 10, 2015 7:38:05 AM

If the limit applies on a per-mortgage basis, unmarried co-owners (gay or not) still have an advantage if they own two properties: One person can borrow against one property and the other person can borrow against the other property. Each person can deduct up to $1.1 million.

Posted by: AMT buff | Aug 10, 2015 5:10:57 AM