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Mortgage Interest Deduction

| August 04, 2016
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Income Tax

An interesting development regarding the limits on the mortgage interest deduction has recently taken place.  The IRS will comply with the Court of Appeals for the Ninth Circuit decision that the mortgage interest limitations are applied on a per-individual basis, and not a per-residence basis (Action on Decision 2016-02, 2016-31 IRB, 08/03/2016, IRC Sec(s)).  The significance of this is that unmarried co-owners are each allowed to deduct the interest on up to $1 million of acquisition debt and $100,000 of home equity debt.

For example Joe buys a residence with his parents that they will both reside in.  The fair market value of the residence is $3 million and Joe and his parents have a mortgage on the residence of $2.5 million dollars.  Joe can deduct his share of the mortgage interest on up to $1 million dollars of acquisition debt and $100,000 of home equity debt.  Joe's parents can also deduct their share of the mortgage interest on up to $1 million dollars of acquisition debt and $100,000 of home equity debt.

As a reminder the following are the general rules regarding the deduction for qualified residence interest.  Qualified residence interest is interest paid or accrued on acquisition debt, which is debt: a) incurred to acquire, construct, or substantially improve any qualified residence of the taxpayer, and b) that's secured by the residence. A qualified residence is a taxpayer's principal residence and one other home that is used as a residence by the taxpayer. The aggregate amount treated as acquisition debt can't exceed $1 million for any period (or $500,000 in the case of a married individual filing separately).

Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured by taxpayer's qualified residence, to the extent the aggregate amount of the debt doesn't exceed the fair market value (FMV) of the residence, as reduced by the amount of acquisition indebtedness on it.  The total amount treated as home equity indebtedness for any period can't exceed $100,000 ($50,000 in the case of a married individual filing separately.

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