Co-Owners of Two Residences Limited on Deducting Interest on Acquisition Indebtedness and Home Equity Indebtedness; Limitation Applied on Per-Residence Basis (Sophy, TC)

Individual co-owners of two residences were limited in deducting interest on $1 million of acquisition indebtedness and on $100,000 of home equity indebtedness. The indebtedness limitations were properly applied on a per-residence basis, regardless of the number of residence owners and whether the co-owners were married to one another. The statutory language of Code Sec. 163(h)(3)(B)(i) defined the word taxpayer with respect to acquisition indebtedness only in relation to the qualified residence, not the indebtedness.

Similarly, the language in Code Sec. 163(h)(3)(C)(i) defined home equity indebtedness as any indebtedness secured by a qualified residence and not as any indebtedness relating to an individual taxpayer. The statutory limitation with respect to the acquisition debt and the home equity debt that may be claimed was related to the qualified residence rather than the amount of acquisition debt claimed in relation to an individual taxpayer.

The individual taxpayers who were the co-owners of the residences argued that the indebtedness limitations should apply on a per-taxpayer basis, rather than on a per-residence basis. In addition, they also contended that the language for the indebtedness limitations that created a special rule for married taxpayers who file separate returns should not apply to co-owners who were not married to each other. The court was not persuaded by the taxpayers’ argument due to the residence-focused language used throughout the statute. Code Sec. 163(h)(3)(C)(ii) specifically allocated the limitation amounts that must be used by married couples filing separate returns; therefore, implying that co-owners who were not married to one another could choose to allocate the limitation amounts in some other manner, such as by percentage of ownership.

C.J. Sophy, 138 TC No. 8, Dec. 58,965

Other References:

Code Sec. 163

CCH Reference – 2012FED ¶9402.12

CCH Reference – 2012FED ¶9402.15

Tax Research Consultant

CCH Reference – TRC INDIV: 48,400

CCH Reference – TRC REAL: 6,056.15


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