MoneySmart—Domestic Partner Tax Deductions in Home Ownership

With today’s historically low interest rates, it’s certainly a great time to either purchase or refinance a home. In addition to the accumulation of equity, a home purchase that is financed offers the borrower (or borrowers, if they are legally married and file a joint tax return) the ability to deduct the annual amount of mortgage interest that is paid on tax returns.

According to the IRS, a “qualified” residence refers to your principal residence, as well as one other residence that is also owned and designated as a second home or vacation home.

Deductible interest encompasses both acquisition indebtedness—which includes any indebtedness that is incurred in acquiring, constructing, or substantially improving a qualified residence and is secured by that residence, as well as up to $100,000 in home equity indebtedness that is also secured by a qualified residence—as long as that home equity debt does not exceed the fair market value of the residence reduced by the acquisition costs for that residence.

Tax Filing Status of Domestic Partners

Because of the inability of same-sex couples to be seen as married in the eyes of the federal government, an LGBT couple’s tax deductions are treated differently compared to the deductions of heterosexual married couples. There is really no choice for domestic partners—each partner must file a federal 1040 tax form as a single individual. (In some limited circumstances, one of the partners may be able to file as a “head of household.”)

A Mortgage Interest Advantage for Domestic Partners 

Because domestic partners must file separate tax returns, it is possible that a couple could actually deduct mortgage interest on up to four different residences. This differs from legally married couples who file joint tax returns and are only allowed to deduct the interest on two residences. In this case, however, it is important to keep in mind that each domestic partner can only deduct a portion of the interest that is paid on the jointly owned residence.

Which Partner Should Take the Mortgage Interest Deduction?

When it comes to joint ownership of a qualified residence, each of the owners should typically claim his or her share of the expenditures that were paid throughout the year. If a home is jointly owned by a domestic partner couple, and each individual pays 50 percent of the mortgage and its corresponding interest charges, then the partners should essentially split the deduction on their annual tax returns.

This is especially true if each of the partner’s expenses exceeds the standard deduction, as the partner could then
claim the higher amount. However, a couple might be able to maximize deductions even more by having only one partner claim the entire interest expense deduction.

For example, if Josh and John own a home together and the 2012 mortgage interest is $10,000, and John paid these expenses in full during that year, then John would have $10,000 in deductions on his 2012 tax return and Josh would simply claim the 2012 standard deduction of $5,950. This would give the couple a total of $15,950 in deductions.

If, instead, each of the partners splits the $10,000 in mortgage interest payments and therefore each claimed $5,000 on his individual tax return, then the total deductions for the couple in 2012 would only be $10,000.

For many domestic partners, then, the partner with the higher income should pay all of the mortgage interest and claim that deduction on his or her tax return in order to fully maximize the mortgage interest deduction.

In any case, all tax planning should be done through a qualified professional who is well-versed in these types of issues. In order to ensure the outcome that you desire, it is best to have an accountant or CPA collaborating with your financial professional so as to achieve the very best results.

Grace S. Yung, CFP, is a certified financial planner practitioner with over 18 years of experience in helping domestic partners to plan their finances. She is a principal at Midtown Financial LLC in Houston.

See other MoneySmart columns:

Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?

Protecting the Things that Matter (July 2012  OutSmart)
How those in the LGBT community can use life insurance planning strategies

When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart)
Ensuring both partners’ fair share with a Domestic Partnership Agreement

Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution

Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?

The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price

Gay Money Matters (part 1)(February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning

Gay Money Matters (part 2)(February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t



Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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