Traditionally, taxpayers have been able to deduct mortgage interest paid on mortgages of up to $1 million and Home Equity Lines of Credit of up to $100,000, for a total of $1.1 million in debt upon which mortgage interest paid can potentially be deductible.

These rules apply to both single and married filing joint taxpayers. Taxpayers married filing separate will see the qualifying debt limits reduced by half ($500,000 mortgage and $50,000 Home Equity Line of Credit).

There have been several situations in which taxpayers have struggled to find common ground with the IRS, including

• the debt limitations for unmarried co-homeowners,
• claiming deductions for mortgage interest you reimbursed to another taxpayer, and
• deducting interest paid for a mortgage not in your name. 

Often taxpayers receive notices from the IRS for any one of the above situations, but new case law may effectively reduce the amount of notices taxpayers will receive. Let’s take a closer look: 

Tax Break for Unmarried Co-Homeowners

Until just recently, the home mortgage interest deduction rules weighed unfavorably toward unmarried joint homeowners, allowing the same deductible limitation as married filing joint couples received. Just recently, however, the IRS has recognized the Ninth Circuit Court’s ruling in a case that involved two unmarried joint homeowners attempting to take deductions on mortgage interest payments in which their total debt exceeded the $1.1 million debt threshold. The IRS finally agreed to the Ninth Circuit ruling that if each co-owner can establish that they pay mortgage interest out of separate accounts and each have legal or equitable ownership (e.g. legal responsibility for the mortgage or property), that they may individually deduct mortgage interest paid on up to $1.1 million in debt each or up to $2.2 million combined on their individual tax returns.

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Claiming Mortgage Interest Paid Via a Reimbursement to Another Taxpayer

Many domestic partnerships will involve both individuals paying some or all of the bills of the household, including mortgage payments and consequentially mortgage interest. However, per a recent Tax Court ruling, taxpayers who reimburse their domestic partners for mortgage interest payments, who do not have any legal or equitable ownership (e.g. legal responsibility for the mortgage or property) of the residence, are not allowed to claim a deduction for any portion of the mortgage interest paid.

Deducting Mortgage Interest for a Home not in the Taxpayers Name

Often times taxpayers will take ownership of homes under an oral agreement with their aging parent(s). In the past, you would be hard pressed to claim any mortgage interest paid on that home. However, according to a Tax Court opinion, even if the taxpayer’s name is not on the title of the home, or listed on the mortgage, they may still be able to deduct mortgage interest paid. The taxpayer, in this case, can deduct mortgage interest paid if they provide evidence of paying the mortgage, property taxes, and other related expense of the property (e.g. this shows they are legally responsible for the house, and therefore the mortgage). Taxpayers will note that even if one pays mortgage interest on another home, and the total debt of all the mortgages/ home equity lines of credit do not exceed the $1.1 million thresholds, they may still claim the deduction for the interest paid on both homes.

If you would like to discuss the deductibility of mortgage interest in further detail, please contact us at info@zinnerco.com or any of the professionals here at 216.831.0733. We’re happy to help and rady to start the conversation.