Mansion Global

As Co-Owner of Two Homes, How Much in Total Mortgage Interest Deductions Can I Take?

An IRS decision last year has given owners a big tax break

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sorbetto / Getty Images
sorbetto / Getty Images

Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.

Q:My friend and I bought two $1 million homes together in the United States. Do we have to split the $1.1 million aggregate limit on mortgage interest deductions? 

There’s good news. After years of maintaining that co-owners must split the $1.1 million aggregate limit on indebtedness, the Internal Revenue Service reversed course.

Previously, each person could only deduct interest on up to $550,000 of debt incurred from acquiring, constructing or substantially improving a main or second home, said Michael A. Gillen, director of the Tax Accounting Group at Duane Morris, a Philadelphia law firm. This included interest on up to $100,000 of home equity debt for the property, or $50,000 per person.

More:Will Renovations Trigger a Property Tax Reassessment of My Home?

But the IRS agreed last August with a Ninth Circuit Court of Appeals ruling that when multiple unmarried taxpayers co-own a qualifying residence, the debt limit applies to each taxpayer, not to each residence, said Stuart A. Simon, of counsel with Buchalter law in Los Angeles.

The appeals court held that because married individuals filing separate returns were allowed to deduct interest on as much as $550,000 of home debt each, "Congress implied that unmarried co-owners filing separate returns are entitled to deduct interest on up to $1.1 million of home debt each," Mr. Simon said.

If you and your friend live together, or if one of you lives in each of the homes, you can now deduct interest on the debt for both homes, up to $1.1 million per person, or $2.2 million in total, Mr. Gillen said.  

This per-taxpayer limit is also beneficial if the debt on both homes is unequal, he said. For example, if one of the homes has a mortgage balance of $1.5 million, and a second home has a mortgage balance of $500,000, the total debt is $2 million. Because the limit is per taxpayer, each person’s share of the total liability is $1 million, meaning that all interest would be fully deductible, Mr. Gillen said.

Homeowners who could benefit from this reversal "should review their returns for all open years [generally the past three years] and file refund claims," Mr. Simon suggested. Such taxpayers may include domestic registered partners. Federal tax law doesn’t recognize registered partners as married, he said.

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