Monday, July 6, 2009
$1 Million Deduction Limits on Mortgages
Most people know that home-mortgage interest is tax deductible. If you don’t already know this, you need to call FlemmerAssociates immediately. Don’t bother reading the rest of this article -call us!
When your mortgage is greater than $1 million the allowable deduction is limited to interest on the first $1 million. That’s fairly simple unless the property is owned by more than one individual. In that case, how is the limitation determined and applied to each taxpayer?
The IRS recently issued a determination to assist taxpayers with the questions which arise in this confusing situation. Married taxpayers who file a joint return must look at the total combined indebtedness on the house. In other words, a husband and wife with a $2 million mortgage cannot each claim $1 million in deductions. They are required to look at their combined indebtedness and could claim deductions on no more than $1 million as a couple or no more than $500,000 per individual.
A somewhat cumbersome formula was provided for determining a taxpayer’s qualified interest in a property owned by more than one individual.
1. First, determine the amount of interest paid by that individual.
2. Second, divide $1 million by the amount of the mortgage.
3. Now divide the first number by the second.
This formula allocates the limitation based on interest paid on the mortgage by an individual and not necessarily on percentage of ownership.
Let us know if you have questions about this new ruling and we will be happy to assist you.