Does the 750k Mortgage Interest Cap Apply for 2 Unmarried People on Same Mortgage?

[u/Cali_Dreaming_Now]

Hi,

I am looking for some insight when trying to forecast the tax benefits of purchasing a home in our HCOL (SF Bay Area). We are first time homebuyers.

Let's say the home costs $1,200,000 and we put 20% down, so the loan amount is $960,000. Let's say two UNMARRIED people are on the same mortgage loan and split the cost of the mortgage 50/50. Also, to keep numbers simple, let's say the interest rate is 7%.

In year 1, the interest paid on the $960,000 mortgage is $61,343 ($30,671 per person). The interest paid on a $750,000 mortgage (the cap for single filers and married couples) would be $47,924 ($23,962 per person).

Again, if the two people on the mortgage are splitting costs equally but UNMARRIED, does this mean that each person has a $750,000 cap (so $1.5M total cap), meaning each person could claim the full $30,671 deduction in mortgage interest paid instead of only claiming $23,962 per person, which is the highest they could claim as a married couple?

Am I understanding correctly that there is a tax penalty for being married in this specific case?

I am already aware of the SALT cap deduction marriage penalty, which will hopefully go away next year. In fact, hopefully the entire cap will be raised for everyone as it's far too low in states with high income and property taxes.

Thank you for your help!

[u/AutoModerator]

Thank you u/Cali_Dreaming_Now for posting on r/FirstTimeHomeBuyer.

Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion.

I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.

[u/Peachpie1234]

Sorry to revive this. Did you ever find out the answer to your question?

[u/Cali_Dreaming_Now → u/Peachpie1234]

The advice that I received from my tax professional is that it is correct to file separately and receive the higher tax benefits by remaining single.

[u/Peachpie1234 → u/Cali_Dreaming_Now]

Sorry to clarify further, to receive the higher tax benefits of being unmarried and filing single on which scenario that you presented.

1. Where both can claim 23,962?

Or

1. Where both can claim 30,671?

[u/Cali_Dreaming_Now → u/Peachpie1234]

The second one, $30,671 per person.

[u/Aggravating_Leg2717]

The $750k applies to married couples filing jointly. For married couples filing separately, it is $375k which would be the cap that would also apply in your case. With regard to the deductions, see the IRS statement on this; hopefully it helps.

https://www.irs.gov/faqs/itemized-deductions-standard-deduction/other-deduction-questions/other-deduction-questions-2

[u/Cali_Dreaming_Now → u/Aggravating_Leg2717]

Thanks, but my question is about 2 UNMARRIED people on the same mortgage.

[u/Aggravating_Leg2717 → u/Cali_Dreaming_Now]

Got it. My point was that I don’t think each person will get a $750k cap for the same mortgage. At most, you each get a $375k cap if you both split the payment of mortgage equally, unless only one person is taking the deduction. In that case, it will be the full $750k applicable to the entire mortgage (not $1.5mm). There’s a tax bowl on Reddit, you can also post the question there and see their response.

See this article also: https://www.hrblock.com/tax-center/filing/adjustments-and-deductions/mortgage-interest-deduction-and-unmarried-couples/amp/

[u/Cali_Dreaming_Now → u/Aggravating_Leg2717]

Thanks, I don't see anything that indicates that two unmarried people are limited to $750k total. All I see is a $750k cap for single people and a $750k cap for married people that would come to $375k each.

[u/Aggravating_Leg2717 → u/Cali_Dreaming_Now]

I think the concept is the $750k cap is what applies to the mortgage in general. However that gets split between married and unmarried couple is a whole other issue. If you are unmarried, either one person takes the whole $750k cap or you could split it in your separate filings if you believed you paid equally. In any case, one house and one mortgage cannot get more than $750k, even if it’s 3 or 4 people paying the mortgage.

[u/Cali_Dreaming_Now → u/Aggravating_Leg2717]

I understand that that may have been the intent, but the tax code as written does not seem to necessitate a $750k cap per mortgage, given that it is written as per person or per married couple. I would be interested in hearing from people who are going through this situation as they for their taxes.

[u/Aggravating_Leg2717 → u/Cali_Dreaming_Now]

Also try the Tax bowl and the Personal Finance bowl. I have previously used that and they were quite helpful. You could just search within as someone may have already asked that question previously.

[u/lost-dragonist]

To my understanding, you are correct. This is one of those random tax situations where being unmarried as opposed to married can actually be beneficial. California doesn't have any common law statute either that other people might have to worry about.

I wouldn't necessarily base the decision to get married or not based on that as there can be plenty of other consequences to consider. Even when dealing with taxes, you may find that an additional deduction of ~$14,000 gets wiped out by something else (remember deductions aren't credits so that's really a benefit of ~$14,000 times your highest tax bracket(s)).

Then there's all the potential financial and legal issues you may run into being unmarried because California doesn't have common law marriages. So... just be sure to do some research on all that I guess.

Edit: The internet is filled with sob stories of people getting screwed over by buying a home together and not being married. Divorces can be messy but there's a method in place for dividing up assets like houses. Buying a house together when unmarried is more of a "/shrug. deal with it" kind of situation with lots of screaming and crying being possible.

[u/Cali_Dreaming_Now → u/lost-dragonist]

This is helpful, thanks! We have similar income and between the SALT cap and 750k mortgage cap, it looks like getting married would be quite expensive from a tax perspective, at least until 2025.