Background and Court Rulings – Prior to passage of the Tax Cuts and Jobs Act, mortgage interest was deductible on acquisition debt of up to $1 million. Originally, according to Chief Counsel Advice (CCA 200911077), when two or more individuals jointly owned a residence with acquisition debt exceeding $1 million, the allowable deduction was restricted to the interest on the first $1 million of acquisition debt collectively. This stance was supported by a Tax Court ruling in C. J. Sophy, 138 TC No. 8, Dec. 58,965. The debt limit could be increased by up to $100,000 of equity debt.
However, a significant shift occurred when the Ninth Circuit Court of Appeals overturned the Tax Court’s decision. The IRS acquiesced to this new interpretation, notably in the Voss case (IRB 2016-31, p. 193). Under this approach, unmarried co-owners enjoyed a combined deduction limit for interest paid on a maximum of $2.2 million of acquisition and home equity indebtedness, in contrast to the former $1.1 million cap.
The acquisition debt limit was reduced for loans incurred after December 15, 2017 to $750,000 by the Tax Cuts and Jobs Act, which also eliminated any deduction for equity debt.
Practical Implications for Tax Preparers
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Maximize Deduction Limits: For unmarried co-owners with home loans taken out prior to December 15, 2017, leverage the $2.2 million limit on acquisition and home equity debt interest deductions. This adjustment can translate to substantial tax savings for clients, potentially increasing their disposable income.
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Strategic Planning for New Acquisitions: With the reduced cap of the Tax Cuts and Jobs Act (TCJA), consider the implications of the $750,000 acquisition debt limit. It's presumed that the expanded co-owner benefit under the Ninth Circuit's interpretation applies here as well, allowing unmarried co-owners a combined interest deduction on up to $1.5 million of acquisition debt.
- Counseling on Co-ownership Structure: When advising clients considering joint ownership of a property, highlight this favorable tax treatment for unmarried co-owners. Structuring property purchases with an understanding of these limits can enhance their tax strategy significantly.