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Tuesday, October 06, 2009Mortgage Interest Limitation
The $1 Million Dollar Mortgage Interest Limitation has potential new meaning with recent Chief Counsel Advice
Chief Counsel Advice 200940030 (10/08/2009)
IRS Chief Counsel recently advised that indebtedness incurred by taxpayer to acquire, construct, or substantially improve qualified residence can constitute home equity indebtedness to extent it exceeds $1 million.
TAX LAW BACKGROUND
Currently taxpayers can deduct home mortgage interest if they fall into one of two categories consisting of 1) interest paid on acquisition indebtedness or 2) interest paid on home equity indebtedness. Acquisition indebtedness is indebtedness to acquire, construct, or substantially improve a residence, but the amount treated as acquisition indebtedness cannot exceed $1 million. Home equity indebtedness is indebtedness other than acquisition indebtedness, but the amount treated as home equity indebtedness cannot exceed $100,000.
SITUATION
Facts: Taxpayer buys a principal residence for $1,500,000, paying $200,000 in cash and borrowing the remaining $1,300,000 through a loan that is secured by the residence.
Question: Can $100,000 of Taxpayer's indebtedness in excess of $1 million qualify as home equity indebtedness or is the taxpayer limited to the $1 million cap? If yes; then interest on up to $1.1 million of the debt would be deductible ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness).
The Chief Counsel Advice Memorandum determined that the taxpayer would qualify for a mortgage interest deduction based on the combined $1.1 million dollar cap. This position is contrary to previous Tax Court Memos (Pau v. Commissioner, T.C. Memo. 1997-43 and Catalano v. Commissioner, T.C. Memo. 2000-82). To the extent it becomes the “official” position of IRS there would be little reason for a court to again address the issue.
Note: This Chief Counsel Advice responds to an issue under a specific consideration. This advice may not be used or cited as precedent.
Circular 230 Notice: IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, by any taxpayer for the purpose of avoiding tax-related penalties imposed under the U.S. Internal Revenue Code or any other applicable state or local tax law provision; furthermore, this communication was not intended or written to support the promoting, marketing or recommending of any of the transactions or matters it addresses.
