The tax law isn’t always crystal clear, and when it comes to a question of interpretation, the IRS doesn’t always agree with the Tax Court. The tax agency may appeal a ruling, or simply announce that it will continue to take a contrary position. Normally this happens when the IRS believes the Tax Court has been too generous. In a man-bites-dog story, the IRS recently announced it won’t follow a Tax Court interpretation relating to the mortgage interest deduction because it was too strict.
The issue involves mortgages of more than $1 million. The law says you can deduct interest on up to $1 million of mortgage debt incurred in acquiring a home, and also deduct interest on $100,000 of home equity debt. If you take out a mortgage of more than $1 million in buying a home, you might wonder whether you can treat the excess (up to $100,000) as home equity debt. In two cases (both “memorandum decisions” involving a single judge rather than the court as a whole) the Tax Court ruled that the $100,000 allowance for home equity debt can’t be used to enlarge the $1 million limit on acquisition debt. The IRS now says (Rev. Rul. 2010-25 (PDF)) it won’t follow those cases. If you take out a $1,300,000 mortgage in buying a home for $1,500,000, for example, you’ll be able to deduct interest on $1,100,000 of that amount, not just $1 million as the Tax Court ruled.
Tags: mortgage interest
