The Tax Court has rendered a decision that could affect unmarried individuals who share a residence, same-sex married couples and multiple families who pool their resources to purchase a vacation home.
Charles Sophy and Bruce Voss bought two houses as joint tenants. They financed the purchases by obtaining a mortgage secured by each house.
Sophy and Voss also obtained a home equity line of credit for one of the houses. They were jointly and severally liable on the mortgage and home equity debt.
On audit, the IRS determined that Sophy and Voss were together limited in deducting interest on $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. The IRS contended that the limitations applied on a per-residence basis, regardless of how many owners were involved and whether the co-owners were married to each other.
In the IRS view, co-owners are collectively limited to a deduction for interest paid on a maximum of $1.1 million of acquisition and home equity indebtedness ($1 million + $100,000).
Sophy and Voss argued that the limitations on indebtedness should be applied on a per-taxpayer basis for co-owners who are not married to each other. In their view, each co-owner should be allowed a deduction for interest paid on up to $1.1 million of acquisition and home equity indebtedness.
The court sided with the IRS. The court found nothing in the legislative history suggesting that Congress had any intention other than a per-residence limitation. (Charles J. Sophy, et al. v. Commissioner, 138 T.C. No. 8, March 5, 2012)