Limit on Mortgage Interest Deduction for Married Filing Separate

January 21st, 2013

In an interesting 2012 Tax Court case, Bronstein vs. Commissioner, the strict interpretation of the Section 163 limitation on the mortgage interest deduction for married taxpayers filing separately was brought into question.   Faina Bronstein and her husband purchased a $1.3 million home in 2007, taking out a $1 million mortgage. The home was their primary residence. The Bronsteins chose the option of “married filing separate” that year, and Faina deducted all of the mortgage interest paid (which amounted to $50,000). The IRS, using a plain interpretation of the statute, disallowed half of Faina’s deduction. Section 163, the statute governing the $1,000,000 limitation provides that:

  • The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of married individuals filing a separate return)
  • The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual)

Faina argued in her defense that the intent of the statute was to accommodate situations where the husband and wife jointly paid mortgage interest but chose to file different returns. In her case, however, she paid all of the interest expense. Faina therefore argued that she should be entitled to deduct interest on the full debt amount of $1,000,000. The Tax Court disagreed and upheld instead a strict adherence to the statutory language.

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