We’ve compiled a list of 2021 tax tips to help you get prepared.
2021 TAX Planning Alert: Not Just for Same-Sex Couples
This rule applies to friends, family members, and unmarried partners.
The court ruling in California gives unmarried couples and co-owners a big tax break.
Home mortgage interest is deductible if paid or accrued on either acquisition indebtedness or home equity indebtedness secured by a qualified residence. A taxpayer can have two eligible houses: the taxpayer’s principal residence and one other home used as a residence not rented.
Double Mortgage Interest: The IRS has announced that it will not dispute the holding of a federal appeals court decision regarding the limit on mortgage interest deductions under Code Sec. 163 (Voss, CA-9, 2015-2, etc. 50,427). When two or more unmarried taxpayers own a qualifying residence, the court found that specific limits on the deduction apply per taxpayer rather than per home. As a result, the unmarried co-owners could take a larger interest deduction than the limit applied per residence.
In AOD 2016-02, the IRS acquiesced in the Ninth Circuit’s decision in Sophy v. Commissioner, in which the appeals court overturned a Tax Court decision and allowed a same-sex, unmarried, cohabiting couple to each deduct the mortgage interest on $1.1 million of acquisition and home equity debt. In reaching its conclusion, the Ninth Circuit determined that the mortgage interest limitation applies on a per-taxpayer, rather than a per-residence, basis. The AOD issued by the IRS confirms that the Service will follow this treatment.
Remember that you can take advantage of this rule this year when you file your 2021 Individual Income Tax Returns.
The IRS’s new position on the mortgage deduction could yield enormous tax savings for unmarried couples, friends, and family members, who co-own property and split mortgages into the most expensive areas in the country, such as Manhattan or San Francisco.
Cohabitation, of course, is not limited to same-sex couples. So the Service’s decision to allow each taxpayer who co-owns a house to claim an interest deduction on the total mortgage debt — provided they are not married filing separately — should be a welcome one for many.
The ruling could also apply to friends or family who want to buy real estate together. Still, buying real estate with friends, family, or an unmarried partner is risky and can get messy if you stop getting along or decide to break up. (A 2006 movie starring Jennifer Aniston and Vince Vaughn centered on this scenario.)