Mortgage Interest Deduction for Unmarried Couples

A recent decision by the IRS further increases the ‘marriage penalty’ but benefits unmarried couples. The IRS announced in early August that it would allow two unmarried domestic partners to each claim a home mortgage interest deduction on a home they owned together.

Under Section 163(h)(3) for the Internal Revenue Code, a taxpayer may deduct interest paid on a mortgage, limited to $1,000,000 of mortgage debt and $100,000 of a home equity line of credit. The debt limit is $550,000 for a married taxpayer filing a separate return.

In the case Sophy v. Commissioner, the IRS acquiesced in the Ninth Circuit’s decision to allow an unmarried, cohabitating couple to each deduct the mortgage interest on $1.1 million of mortgage and home equity debt. Initial reactions to the court decision by tax professionals suggest that the ruling bodes well for single taxpayers.

Married couples are unaffected as the limit remains at $1.1 million combined or $550,000 if filing separately. Same-sex couples who are legally married under state law will now have to file married filing jointly or married filing separately. Which means, they are now also limited to the $1.1 million combined deduction.