In Sophy v. Commissioner (Tax Court, March 5, 2012), the U.S. Tax Court addressed the application of the $1 million limit for deducting interest expense on a home mortgage. Although personal interest is not generally deductible, interest on up to $1 million of debt can be deducted if the proceeds of the debt were used to purchase, construct, or substantially improve the taxpayer’s primary residence and one other dwelling used as a residence by the taxpayer. Interest on an additional $100,000 of debt can be deducted as “home equity” indebtedness if the loan is secured by the residence.
If unmarried taxpayers purchase a residence as co-owners, are they limited to interest on $1.1 million of debt, or do they each get that amount for a total of $2.2 million? The IRS has always taken the position that, regardless of the number of owners, the limitations are determined on a perresidence basis, so that co-owners would only be able to deduct interest on total debt of $1.1 million – $550,000 each. IRS first made its position on this issue known in 2009 when it issued Chief Counsel Advice 200911007. In the Sophy case, the U.S. Tax Court agreed with the IRS and limited each individual taxpayer to a deduction of interest on debt of $550,000.