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Ninth Circuit Reverses Tax Court: Unmarried Co-owners Apply Mortgage Interest Limitation on Per-Taxpayer Basis.

(Parker Tax Publishing August 22, 2015)

Earlier this month, in an issue of first impression, the Ninth Circuit reversed the Tax Court and held that, when unmarried taxpayers co-own a qualifying residence, the limitation on the qualified residence interest deduction applies on a per-taxpayer rather than on a per-residence basis. Voss v. Comm'r, 2015 PTC 275 (9th Cir. 2015)

As noted in the Voss court's dissenting opinion, the decision means that unmarried taxpayers who co-own their home are not limited to deducting the same amount as married taxpayers filing jointly. Instead, they can deduct up to twice the amount of interest as married taxpayers.

The case involves the interpretation of the mortgage and home equity debt limitations under Code Sec. 163(h)(3). That provision states that a taxpayer can deduct the interest paid on home acquisition indebtedness and/or a home equity line of credit for a principal residence and a second home. Specifically, the statute provides that the aggregate amount that a taxpayer may treat as acquisition debt for any year cannot exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return). The aggregate amount that a taxpayer may treat as home equity debt for any year cannot exceed $100,000 ($50,000 in the case of a separate return by a married individual).

Although the statute is specific with respect to a married taxpayer filing a separate return, it does not specify whether, in the case of co-owners who are not married, the debt limits apply on a per-residence or per-taxpayer basis.


Bruce Voss and Charles Sophy are registered domestic partners in California. They co-own two homes as joint tenants: one in Rancho Mirage, California, and the other, their primary residence, in Beverly Hills, California. In 2002, they refinanced the Rancho Mirage property and obtained a mortgage of $500,000. In 2003, they refinanced their Beverly Hills property and obtained a mortgage of approximately $2,000,000. When they refinanced the Beverly Hills mortgage, Voss and Sophy also obtained a home equity line of credit of $300,000. Voss and Sophy are jointly and severally liable for the mortgages and home equity line of credit. The total average balance of the two mortgages and the line of credit in 2006 and 2007 (the two taxable years at issue) was approximately $2.7 million each year.

Voss and Sophy each filed separate federal income tax returns for 2006 and 2007. In their respective returns, they each claimed deductions for interest paid on the two mortgages and the home equity line of credit. The IRS audited those returns and limited Voss and Sophy's deductible mortgage interest to interest on $1.1 million of debt in total. Thus, the IRS applied the mortgage interest deduction limitation using a per-residence basis, rather than the per-taxpayer basis used by Voss and Sophy.

OBSERVATION: It's important to note that, according to the IRS, registered domestic partners may not file a federal return using a married filing separately or jointly filing status. Registered domestic partners are not married under state law and, thus, are not married for federal tax purposes. The IRS notes that this remains the case even after the Supreme Court's decision in U.S. v. Windsor, 2013 PTC 167 (S. Ct. 2013), a decision which treats all married same-sex couples as married for federal tax purposes. See IRS website, Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions.

Voss and Sophy took their case to the Tax Court, arguing they each should each be allowed a deduction for interest paid on up to $1.1 million of mortgage and home equity indebtedness with respect to the jointly owned residences.

Tax Court's Decision

In 2012, in Sophy v. Comm'r, 138 T.C. 204, the Tax Court held that the limitations in Code Sec. 163(h)(3) apply to the aggregate indebtedness on up to two residences, and co-owners not married to each other could not deduct more than a proportionate share of interest on $1.1 million of acquisition indebtedness and home equity debt. In looking at the various definitions used in Code Sec. 163(h)(3), the court noted the repeated use of the phrases "with respect to a qualified residence" and "with respect to such residence" and concluded that the Code focuses on the residence rather than the taxpayer.

The court also noted that the use of "any indebtedness" in the definition of "acquisition indebtedness" was not qualified by language regarding an individual taxpayer. From this, the Tax Court surmised that the phrase referred to the total amount of indebtedness with respect to a qualified residence and which was secured by that residence. Thus, the Tax Court concluded that, when the statute limits the amount that may be treated as acquisition indebtedness, it appeared that what was being limited was the total amount of acquisition debt that could be claimed in relation to the qualified residence, rather than the amount of acquisition debt that could be claimed in relation to an individual taxpayer.

The Tax Court further reasoned that the married-person parentheticals were consistent with its per-residence interpretation, as the parentheticals made clear that married couples (whether filing separately or jointly) are, as a couple, limited to deducting interest on $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. The purpose of the parentheticals, the Tax Court explained, was simply to set out a specific allocation of the limitation amounts that must be used by married couples filing separate tax returns, thus implying that co-owners who are not married to one another may choose to allocate limitation amounts among themselves in some other manner, such as according to percentage of ownership.

Ninth Circuit's Analysis

On appeal, the Ninth Circuit reversed the Tax Court and held that the debt limitation provisions in Code Sec. 163(h)(3) apply on a per-taxpayer basis rather than a per-residence basis. The court observed that, while the statute is mostly silent about how to deal with co-ownership situations, it is not entirely silent. The court focused on the fact that both the mortgage debt and home equity debt provisions contain a parenthetical that speaks to one common situation of co-ownership: married individuals filing separate returns. The parentheticals provide half-sized debt limits "in the case of a married individual filing a separate return" and the court found Congress's use of the phrase "in the case of" important.

First, the court observed, the parentheticals clearly speak in per-taxpayer terms: the limit on acquisition indebtedness under Code Sec. 163(h)(3)(B)(ii) is "$500,000 in the case of a married individual filing a separate return," and the limit on home equity indebtedness under Code Sec. 163(h)(3)(C)(ii) is "$50,000 in the case of a separate return by a married individual."

Second, the court said, the parentheticals don't just speak in per-taxpayer terms; they operate in a per-taxpayer manner. The parentheticals give each separately filing spouse a separate debt limit of $550,000 so that, together, the two spouses are effectively entitled to a $1.1 million debt limit (the normal limit for single taxpayers). They do not, the court noted, subject both spouses jointly to the $550,000 debt limit specified in the statute.

Finally, the court concluded, the very inclusion of the parentheticals suggests that the debt limits apply per taxpayer. According to the court, if the $1.1 million debt limit truly applied on a per-residence basis, as the Tax Court held, the parentheticals would be superfluous, as there would be no need to provide that two spouses filing separately get $550,000 each. By contrast, the court noted, if the $1.1 million debt limit applies on a per-taxpayer basis, the parentheticals actually do something: they give each separately filing spouse half the debt limit so that the separately filing couple is, as a unit, subject to the same debt limit as a jointly filing couple.

Dissenting Opinion

In a dissenting opinion, Judge Ikuta opined that the majority's interpretation of the debt limitation in Code Sec. 163(h)(3) allows 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. He agreed that the statute's language is ambiguous. However, he found reasonable the IRS interpretation limiting unmarried taxpayers in this situation to a deduction in the same amount as married taxpayers filing jointly and opined that the Tax Court should defer to this reasonable interpretation. For a discussion of qualified residence interest, see Parker Tax ¶83,515. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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