Qualified residence interest limits apply on a per residence basis.

• Author: Beavers, James A.

The Tax Court held that, for purposes of calculating qualified residence interest, the Sec. 163(h)(3) limits on the amount of indebtedness that qualifies as acquisition or home equity indebtedness do not apply separately to co-owners of property who are not married.

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Background

In 2000 Charles J. Sophy and Bruce H. Voss purchased a house together in Rancho Mirage, Calif., and financed the purchase by obtaining a mortgage that was secured by the Rancho Mirage house. In 2002, Sophy and Voss also purchased a house in Beverly Hills, Calif., that they financed with a mortgage secured by the house. They acquired both houses as joint tenants and held them as joint tenants during the years in issue. The two used the Beverly Hills house as their principal residence and the Rancho Mirage house as their second residence.

In 2006, Sophy paid mortgage interest of $94,698 for the two residences, and Voss paid $85,962. The total average balance in 2006 for the Beverly Hills house mortgage and home equity loan and the Rancho Mirage house mortgage was $2,703,568. In 2007, Sophy paid mortgage interest of $99,901, and Voss paid $76,635. The total average balance in 2007 for the two mortgages and the home equity loan was $2,669,136. On his tax returns for 2006 and 2007, Sophy claimed deductions of $95,396 and $65,614, respectively. Voss claimed deductions of $95,396 and $88,268, respectively.

On audit, the IRS disallowed a portion of both taxpayers' deductions for qualified residence interest for 2006 and 2007. The IRS found that the taxpayers had deducted interest on an amount of indebtedness greater than that allowed under the limits in Sec. 163(h)(3).

Sec. 163(h) and the Parties' Arguments

Sec. 163(h)(2) makes an exception to the rule in Sec. 163(h)(1) that a taxpayer cannot deduct personal residence interest. Qualified residence interest is interest on acquisition indebtedness or home equity indebtedness with respect to a taxpayer's qualified residence (in this case, there was no question that the residences involved were qualified residences). However, under Sec. 163(h)(3), for purposes of determining the amount of qualified residence interest, the amount of indebtedness that can be treated as acquisition indebtedness is limited to $1 million in the case of acquisition indebtedness and to $100,000 in the case of home equity indebtedness.

In its determination of the deductible qualified residence interest of Sophy and Voss for 2006...