Taxpayers living in Vail Colorado contacted me most recently to represent them in an Internal Revenue Service audit covering tax years 2009, 2010 and 2011 relevant to several small items but specifically to the mortgage interest deduction claimed on Schedule A of Form 1040.

The taxpayers are domestic same sex partners each filing their own federal and Colorado income tax forms. Upon further inquiry it became clear to me that this file had many of the same characteristics of the United States Tax Court Case Sophy v. Commissioner.

In Sophy v. the Commissioner a domestic couple owned their principal residence in California as joint tenants. Together they held a mortgage of $2,000,000 on the residence and took out an additional $300,000 line of credit secured by the residence. They were not married and as such on their respective tax returns deducted mortgage interest on their respective portion of the mortgage.

In examination the IRS’ position was that the $1,000,000 and $100,000 limitations apply per property and not per taxpayer limiting the interest deductions to the interest on the combined total of $1,100,000. The United States Tax Court agreed with the IRS.

According to Internal Revenue Code 163 and Internal Revenue Bulletin 2010-44 there are two limits on mortgage interest which are applied per property:

1. Acquisition Indebtedness limit of $1,000,000.

2. Home Equity Indebtedness limit of $100,000.

The difference is that Home Equity Indebtedness can be used for any purpose including acquiring the residence.

Unfortunately there is little that can be done to help the taxpayers living in Vail other than to help them understand that the limitations in question apply per property and perhaps guide them to seek negligible relief through a penalty abatement request.