By David P. Veniskey, CPA, AEP and T.J. O’Connor
Nearly a year after a split Ninth Circuit panel overturned the previous Tax Court decision giving unmarried couples double the mortgage interest deduction available to married couples, the IRS has issued AOD 2016-02, 2016-31 IRB 193 (Aug. 1, 2016), acquiescing in the Ninth Circuit’s decision in Voss v. Commissioner, 796 F. 3d 1051 (9th Cir. 2015). The Voss decision held that the § 163(h)(3) limitations on mortgage interest deductibility are applied on a per-taxpayer basis, rather than on a per-residence basis. Therefore, the $1 million of acquisition indebtedness plus $100,000 of home equity indebtedness equals to a total of $2.2 million of potential mortgage deductions for unmarried couples. However, married couples in the same situation are limited to only half of this total.
As mentioned, the $1.1 million of potential mortgage deductions applies to married couples filing jointly. Correspondingly, a married couple that chooses to file separate returns is limited to $550,000 ($500,000 of acquisition indebtedness and $50,000 of home equity indebtedness) on their respective tax returns. To clarify what this means, here’s an example of how an unmarried couple is benefitting from the above rulings.
In Scenario A, an unmarried couple purchases a house with a total acquisition indebtedness of $2 million and $200,000 of home equity indebtedness for total debt of $2.2 million. In Scenario B, there is the same breakdown of debt, however this time it’s a married couple that file separate returns that are purchasing a house. Due to the Voss decision, the unmarried couple (scenario A), are each able to deduct the mortgage interest on up to $1.1 million of qualified indebtedness on their individual tax returns for a total for the couple of interest on $2.2 million of qualified indebtedness. The married couple (scenario B), who are filing separate returns only deduct the mortgage interest on $550,000 of qualified indebtedness on their respective returns for a total deduction for the couple based on the $1.1 million limitation.
An IRS Action on Decision (AOD) gets issued at the discretion of the Service only on unappealed issues decided adverse to the government. It generally functions as guidance for Service staff working with similar issues. Unlike a Revenue Ruling or Treasury Regulation, an AOD isn’t an affirmative statement of Service position. An AOD isn’t intended as public guidance and may not be cited as precedent. Recommendations inclusive to an AOD may be superseded by new legislation, regulations, rulings, or cases.
For more information about tax related matters, please visit us at https://efprgroup.com/service-areas/tax-business-services/
David P. Veniskey, CPA, AEP is a Partner at EFPR Group, LLP in the Tax and Business Services department. He oversees a wide variety of engagements, and provides internal resources and guidance on an array of technical issues. Dave has acquired experience in numerous industries including emerging technology, engineering, manufacturing, distribution, construction and professional services. HIs service area expertise includes individual and business tax compliance, business advisory services, estate and trust planning and administration, business tax and investment incentives, strategic planning and, merger and acquisition related services. Dave is also a managing principal of EFPR Solutions, LLC, a division that provides outsourced and resource-based accounting and finance services.
T.J. O’Connor is a Tax Specialist at EFPR Group, LLP in the Tax and Business Services department. He has over 20 years of accounting and finance experience working with corporate, private and public companies. T.J. has experience in numerous industries including manufacturing, medical services(vision), and material handling. He specializes in state and local tax services with a focus on multi-state sales and use taxes. T.J. is also a member of EFPR Group’s SALT committee.