Home Ownership by Unmarried Individuals

by Kenneth Hoffman in , , ,

If you co-own a home with someone who is not your spouse, such as a significant other or sibling, special tax rules apply to you during the period of ownership as well as at the time of sale. Watch for dollar limitations and allocations of tax benefits.

Mortgage interest

Interest on acquisition debt to buy, build, or substantially improve a principal residence plus one other designated home cannot exceed $1 million. Interest on home equity debt is limited to borrowing up to $100,000. To qualify for either acquisition debt or home equity debt, the debt must be secured by the first or second home.

The same $1.1 million combined debt limit applies to joint filers and single individuals. However, unmarried co-owners with total mortgages exceeding $1.1 million on their first and/or second homes must allocate the limit between them and deduct only a proportionate share of the interest paid. The allocation can be based on any reasonable method, such as by:

  1. The amount of mortgage payments during the year. For example, if one owner made all of the mortgage payments, that owner would be entitled to deduct 100% of the mortgage interest, up to the dollar limits.
  2. The percentage of home ownership. For example, if the home is owned 50/50, then each owner could deduct half of the total mortgage payments, regardless of which one actually made the payments.

Real estate taxes

There is no limit on the amount of real estate taxes that can be deducted. Again, co-owners can allocate the deduction for property taxes in any reasonable manner. Again, this can be done according to the percentage of ownership or the actual real estate taxes paid in the year.

Recapture of the homebuyer credit

If co-owners claimed a first-time homebuyer credit for the purchase of principal residence several years ago, recapture of the credit to the extent required is allocated in the same way in which the credit was originally claims. For example, if two people bought a home in 2008 and claimed the $7,500 credit, $500 of that credit must be recaptured in 2012. The amount that each owner recaptures depends on how much of the credit each owner claimed. If they split the credit, then each recaptures $250 on his or her personal income return.

Home sale exclusion

Gain on the sale of a principal residence (other than gain allocated to nonqualified use of the home) can be excluded up to a set dollar limit as long as you used the home as your principal residence for at least 2 of the 5 years preceding the date of sale. The dollar limit for a single individual is $250,000 of gain.

When co-owners are unmarried, each can exclude his or her share of gain up to this dollar limit. The dollar limit does not have to be apportioned between the owners. For example, if a home that is co-owned equally by 2 unmarried individuals is sold for a gain of $550,000, one-half of the gain, or $275,000 is allocated to each owner. Each owner can exclude up to $250,000 of gain on their personal income tax returns.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.