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IRS acquiesces to appeals court ruling on mortgage deduction

On Behalf of | Sep 14, 2016 | Tax Law

Taxes are often used for more than simply revenue generation. An example is the mortgage tax credit, used to encourage homeownership. To the benefit of millions of taxpayers in Ohio, taxpayers can deduct the interest payment on their home mortgages from their income tax filing. With many people paying thousands per month on their mortgages, receiving that deduction off their taxes can make April 15 every year seem like less of a depressing day.

However, like everything in the tax code, there are limits. The good news for certain taxpayers is that the amount of the mortgage subject to the interest deduction has just gone up, as long as they are unmarried co-owners of the property. A ruling by The Ninth Circuit found that the unmarried co-owners were not limited to the $1.1 million cap, but instead, they received a $2.2 million cap because the deduction applies on a per-individual basis when they file separately.

For the taxpayers in the case, the IRS had audited and disallowed their per-individual interest deduction of the full $1.1 million mortgage and home equity loan, as the Service applied the deduction on a per-residence basis and the Tax Court had affirmed. The Ninth Circuit, however, disagreed and ruled in favor of the taxpayers.

The ruling does not affect the deduction limits that apply to married taxpayers, as the language of the Internal Revenue Code explicitly specifies that a married person filing separately is limited to $500,000 of mortgage indebtedness on a qualified residence.

While the Ninth Circuit rulings are typically only applicable to states in the west, the benefit of this ruling will be applicable for Ohio taxpayers due to the IRS acquiescing. This means the IRS will abide by the ruling for all states. If the IRS did not acquiesce, Ohio residents would have had to hope for a similar decision from the Sixth Circuit or the U.S. Supreme Court.