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Favorable Decision on the Deduction of Mortgage Interest

Berdon Tax Team 09.08.2015 | eVisor

The Ninth Circuit Court of Appeals recently allowed two unmarried co-owners of a property to apply the mortgage interest deduction on a per-taxpayer basis rather than on a per-property basis - enabling each to take the full deduction and essentailly realize twice the benefit. This interpretation is not shared by the Internal Revenue Service (IRS) or the Tax Court.  Going forward, it remains uncertain whether the position of the Ninth Circuit will be sustained in future litigation in the face of the position held by the IRS and Tax Court. Taxpayers should take a watchful approach.

In Voss v. Commissioner,1the co-owners asserted that they each were entitled to their own limitation for the same property. The IRS took the position that they had to share the limitation. The Ninth Circuit sided with the taxpayers and held that the limitation is on a per-taxpayer basis.

Generally, no deduction is allowed for personal interest.  However, a deduction is allowed for interest on a mortgage on the taxpayer's principal residence and a second home. The home mortgage deduction is limited to the interest on $1.1 million of a taxpayer's mortgage or $550 thousand for married taxpayers filing separately.  This dollar limitation is not subject to inflation adjustment.

The Tax Court supported the IRS (before being overrulled by the appeals court) and held that the limit is on a per-property basis.  The Court of Appeals opinion will only apply to those taxpayers living in the Ninth Circuit - the Pacific Coast - while Tax Court decision will continue to apply to those living outside the Ninth Circuit.  However, the Tax Court is likely to review the position next time it is litigated and determine whether it will adopt the position of the Ninth Circuit.

1 Bruce H. Voss, Petitioner v. Commissioner of Internal Revenue, United State Court of Appeals, Ninth Circuit, Decided August 7, 2015

Questions? Contact your Berdon advisor. Berdon LLP New York Accountants

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