For many years, there has been a disparity between the income tax treatment of married couples and the treatment pertaining to two cohabiting singles, usually to the advantage of the unmarried pair. This has been termed the “marriage penalty.” There have been many proposals to Congress to change this and equalize the treatment. Not only has that not occurred but, quite recently, that penalty has been extended to yet another situation — deducting interest on certain very large mortgages. If you represent high earner/high net worth individuals, this is an important issue to know about.
Under existing law for many years, married couples who bought a principal residence have been permitted to deduct the interest paid on a purchase money loan up to $1,000,000 of acquisition indebtedness. They can also deduct the interest paid on as much as $100,000 of debt for a home equity loan (if taken out to make improvements on that residence). That means the maximum amount on which married couples could deduct interest is $1,100,000, and this is so whether the spouses file jointly or separately.
However, what about a pair of cohabiting singles who buy a home together using a large acquisition loan and who take out a home equity loan? Wouldn’t you think that the amounts of deductible interest for the two couples should be the same irrespective of marital status? Guess what — they aren’t. The U.S. Tax Court so concluded in a case from California (the “Voss case”), reversing earlier authority, and last year the Ninth Circuit Court of Appeals upheld that Tax Court determination. Rather than fight it, the IRS recently acquiesced; and in a ruling identified as “Action on Decision 2016-02,” the IRS extended the determination from the Voss case to all jurisdictions in the United States. This means that each of the individuals in the unmarried couple gets to deduct interest on up to $1,100,000 of qualified indebtedness so that this unmarried pair — even if cohabiting in a sexual relationship — would be permitted to deduct interest on as much as $2,200,000, twice as much as the married couple! Will this significantly impact decisions about marriage by some of the very rich? Will it finally prompt Congress to change the rules?
If you want more information on this topic, contact the firm, Joseph M. Cobert, A Professional Corporation.