Mortgage Deductibility Increases: IRS Loses Court Case


The 9th Circuit Court of Appeals has handed affluent homeowners a very big tax win over the IRS in a split court decision, Voss v. Commissioner, affecting significant numbers of people with jumbo loans.

On August 1st (with little fanfare other than obscure press release posted on the IRS web site) the IRS agreed to “acquiesce” in the appellate court’s decision and apply the court’s decision nationwide.

We’re going to allow qualified unmarried co-owners to go beyond the $1.1 million mortgage cap — all the way up to $2.2 million” the IRS said.

The 9th Circuit Court reversed a previous ruling by the U.S. Tax Court which had limited the “total deductibility of mortgage interest” to $1.1 million for a primary home and second home based on the IRS interpretation of the tax code § 163(h)(3).

The IRS's position §163(h)(3) was based on a PER-RESIDENCE BASIS (and thus limits the deductibility to $1.1 million of mortgage debt).

Voss v. Commissioner was filed by Bruce Voss, who owned in Beverly Hills and Rancho Mirage with celebrity psychiatrist Charles Sophy, as joint tenants who shared the mortgage burden (as co-owners) but were unmarried and not in a domestic partnership.

In Voss v. Commissioner, the 9th Circuit Court ruled §163(h)(3) applied to a PER-TAXPAYER BASIS (for a total of $2.2 million of mortgage debt).

A previous decision by the US Tax Court (Sophy v. Commissioner) had upheld the IRS's position that §163(h)(3) applies on a PER-RESIDENCE BASIS (and thus limited to $1.1 million of mortgage debt).

When Congress set the $1.1 million ceiling back in the late 1980s, there was no mention of benefits for “unmarried co-owners”.

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