You know the saying: first comes love, then comes marriage, but now it seems the federal tax code favors unmarried partners when it comes to claiming a home mortgage interest deduction. Perhaps marriage will be put on hold in light of the little known tax benefit unmarried couples will now receive.
Pursuant to Section 163 of the Internal Revenue Code, taxpayers are permitted to write-off a certain amount of interest paid. A write-off is a deduction in the value of earnings by the amount of an expense or loss. In laymen’s terms, write-offs reduce the amount of taxable income you have. Let’s say you make $100,000 a year and you have $10,000 in write-offs. In this scenario, you would only be taxed on $90,000 in income, not the full $100,000.
The deduction is limited to interest paid on $1 million of mortgage debt and $100,000 of home equity debt. You can combine your deductions on your primary and secondary home for up to $1.1 million dollars as a single person, but once you get married, the law limits the mortgage deductions to $500,000 in acquisition indebtedness and $50,000 in home equity indebtedness. In other words, you’re only allowed to deduct half of what you could as an unmarried person. If, on the other hand, you co-own with your partner and both pay the mortgage payments, you can write-off $1.1 million each, for a total of up to $2.2 million!
What are Property Deductions?
The most common tax deductions for property relate to home ownership. Typical tax deductions include property taxes, mortgage interest and mortgage insurance premiums from your income. If you live in a condominium with HOA fees, the fees are not deductible because they are considered an assessment by a private entity. Taxpayers are allowed to itemize their deductions on the federal Schedule A. These generally result in lowering the taxable income.
How Can Property Deductions be Split Amongst Unmarried Couples?
Unmarried couples who jointly own property are entitled to deduct the amount of mortgage interest and taxes paid for up to $2.2 million, or $1.1 million each. In the past, the Internal Revenue Service (“IRS”) has not allowed such large tax deductions and only allowed a write-off interest of $1.1 million among unmarried couples. However, in 2012, a California couple that jointly owned two expensive houses with big mortgages argued each person should be entitled to the full $1.1 million for allowable deductions. The result was that unmarried co-owners could deduct up to $2.2 million.
While this is a huge tax deduction, it is mostly reserved for people who have mortgage debt in excess of $1.1 million with jumbo loans. Jumbo loans are loans that are bigger than normal and it is a way to buy a high-priced or luxury home. They typically have higher interest rates and larger down payment requirements, although they’re available as fixed-rate or adjustable-rate loans.
It is unclear how many taxpayers would actually qualify for this tax deduction. A recent Redfin survey found that 2,021 millennials have postponed or will postpone a wedding or honeymoon to buy a home. However, most millennials can’t afford to buy a home with a large downpayment that is so expensive the mortgage debt is in excess of $1.1 million, meaning the purchase price is over $1.1 million.
Some tax experts believe the number is quite high. Single professionals with jumbo mortgages include individuals with high-paying jobs, such as doctors, lawyers, business executives, investors, and recently divorced people.
So how does this tax deduction affect you? If you’re married, it doesn’t. If you’re unmarried and own a property by yourself, it also doesn’t impact you. But if you jointly own a property with your significant other, are unmarried, and have a mortgage debt of over $1.1 million dollars, then you can take advantage of this huge tax break.
Authored by Erin Chan-Adams, Legal Match Legal Writer and Attorney at Law
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