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New tax break for rich unmarried homeowners

You can deduct your mortgage interest on your income taxes, but there’s a limit – you can only deduct the interest on up to $1 million of mortgage debt used to buy the property, plus $100,000 in home equity loans.

In a recent California case, a wealthy unmarried couple jointly owned a home that had a $2 million mortgage. They got into a dispute with the IRS over whether the $1 million limit applied to them jointly or individually.

The U.S. Tax Court initially sided with the IRS, and said the $1 million limit applied per home. But a federal appeals court in San Francisco overruled that decision. It said the $1 million limit applied per taxpayer, at least where the two taxpayers weren’t married. Therefore, the couple could deduct the interest on the entire $2 million mortgage.

This is a good example of a marriage penalty – if the couple got married, they would lose their full deduction.

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