A federal appeals court has reversed a Tax Court decision in favor of an unmarried couple, finding the mortgage debt limit provision in the Tax Code applies on a per-taxpayer basis and allowing each of them to deduct mortgage interest up to the $1.1 million limit.
Bruce Voss and Charles Sophy, unmarried co-owners of real property in Beverly Hills and Rancho Mirage, Calif., each claimed a home mortgage interest deduction under Section 163(h)(3) of the Tax Code. The Code section allows taxpayers to deduct interest on up to $1 million of home acquisition debt and $100,000 of home equity debt. The IRS determined that Voss and Sophy were jointly subject to section 163(h)(3)’s debt limits, and thus disallowed a substantial portion of their claimed deductions.
Voss and Sophy claimed that the provision applied on a per-taxpayer basis, so that they were each entitled to deduct interest on up to $1.1 million. The Tax Court agreed with the IRS.
In a split decision last week, the U.S. Court of Appeals for the Ninth Circuit reversed the Tax Court, holding that Voss and Sophy were each entitled to deduct mortgage interest up to the $1.1 million limit.
“We infer this conclusion [that the debt limit provisions apply on a per-taxpayer basis to unmarried co-owners of a qualified residence] from the text of the statute. By expressly providing that married individuals filing separate returns are entitled to deduct interest on up to $550,000 of home debt each, Congress implied that unmarried co-owners filing separate returns are entitled to deduct interest on up to $1.1 million of home debt each,” the court stated.
Judge Sandra Segal Ikuta, in a dissenting opinion, noted that the majority concedes that the statute is “anything but plain.”
“The IRS has provided a workable approach to Congress’s ambiguous statute that avoids many of the problems created by the majority’s opinion,” she wrote. “Neither the majority nor Voss and Sophy offer arguments that would compel departing from this approach.”
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