Limits on Millionaires

Today TaxMama hears from George in the TaxQuips Forum, with an interesting question. George asks, “Has there been any further guidance on the IRS Memo # 200911007 (dated 11/24/2008; released 3/13/2009) relative to applying the $1 million limit per property as opposed to per taxpayer with respect to mortgage interest deductions?  This become a big issue in high cost states like California and interestingly, has not received all that much attention .”

Dear George

That’s an interesting question.  For a second there, reading your question, I got excited.  I thought you meant someone could deduct the mortgage interest on loans of up to $1 million for EACH HOUSE they owned.

It turns out the memo limits the $1 million to all people who own a particular house – in other words, if two people own a house with a $1.5 million mortgage, they cannot each deduct the interest on up to $750,000 of the loan. They may each only deduct the interest on, say $500,000. Or one of them may deduct the interest on $1 million, while the other deducts nothing. 

I was looking around yesterday to see if there was anything new about this – and don’t see anything. You’re right about the lack of attention.  I wasn’t familiar with this Chief Counsel memo. Reading it, somehow, it seemed to me to be more specifically focused on the people in this particular instance, than all people. It appears that only one of them are making the payments, anyway.

I am wondering if this can’t be overcome in other instances where each owner does have proportionate risk of loss, contributions to the down payment and to the monthly payments. Perhaps even title in common.

There is an excellent analysis of a potential way to overcome the limitations on LinkedIn by a CPA, K Chin. It may be risky. If IRS feels that you are taking too aggressive a position, you could face penalties.  Will your client pay them?

The other concern? When you take an excessively aggressive position, it may be referred to the Office of Professional Responsibility to start an investigation into your practices. It could cost you your license. So build a solid foundation before you take this position.

On the other hand, if you take this position, you can fight your case through the courts. This is not LAW. It’s an interpretation of the law. The Courts do not always agree with IRS’s interpretations. And the Courts are not bound by IRS Regulations or Memos. The Court will go back to the IRC and to the Congressional meetings to determine the intent of the law. You can, too.

 In this case, I really feel it’s worth a fight if your client can afford it. That Chief Counsel Memo really sounds like it was specifically issued to someone who added an owner just to be able to spread the interest expense. I didn’t get the sense that the second person was a real owner. Did you?

And remember, you can find answers to all kinds of questions mortgage interest, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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