Ninth Circuit: Home mortgage interest; Tax Court reversed

Home mortgage interest; Tax Court reversed

The U.S. Court of Appeals for the Ninth Circuit today reversed a Tax Court decision concerning the section 163(h)(3) limitations on indebtedness when unmarried co-owners seek to deduct mortgage interest for their qualified residence.

Related content

The Tax Court in 2012 held that the debt limit provisions are to be applied on a per-residence basis, not per-taxpayer basis, when the property is co-owned by individuals who are not married to each other.

The Ninth Circuit today reversed, and held that the debt limit provisions of section 163(h)(3) apply on a per-taxpayer basis to unmarried co-owners of a qualified residence. Voss v. Commissioner, No. 12-73257 (9th Cir. August 7, 2015)

 

Read the Ninth Circuit’s 50-page decision [PDF 237 KB] that includes a dissenting opinion.

Summary

As the Tax Court found, the two unmarried individuals in this case jointly owned two residential properties in California, subject to total acquisition indebtedness (home mortgage) and home equity loan exceeding $2.6 million.

On audit, the IRS disallowed a portion of each individual’s claimed deductions for qualified residence interest.

The taxpayers asserted that the indebtedness limitation under section 163(h)(3) is to be applied on a per-taxpayer basis—not on a per-residence basis—and that each person is to be allowed a deduction for interest paid on up to $1.1 million of acquisition and home equity indebtedness with respect to the residences that they jointly own.

The IRS countered that the indebtedness limitations apply on a per-residence basis, regardless of the number of residence owners and whether the co-owners are married to each other (thus, for a maximum of $1.1 million of acquisition and home equity indebtedness).

The Tax Court in 2012 agreed with the position of the IRS that the limitations on the amount of acquisition and home equity indebtedness are applied on a per-residence basis when the residence co-owners are not married to each other.

Today, the Ninth Circuit majority found that section 163(h)(3) was silent as to the debt limit provisions when two or more married co-owners of a residence claimed the home mortgage interest deduction, but inferred from the statute’s treatment of married individuals filing separate returns that the debt limits apply to unmarried co-owners on a per-taxpayer basis.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform