Paula purchased a home with her husband, Lincoln, in January of 2022 for $700,000. In June of 2022, Paula and Lincoln separated. On December 31, 2023, they were still legally married but did not live together all year. They do not live in a community property state. Lincoln refused to file a joint return with Paula. Paula filed her return using the married filing separately filing status. Paula is living in the home and has continued to make the mortgage payments using funds from her own account. Paula will be itemizing her deductions. On what portion of the acquisition debt will interest be deductible on Paula's tax return for 2023?

1 answer

To determine the deductible portion of the acquisition debt interest on Paula's tax return for 2023, we need to consider the following factors:

  1. Acquisition Debt Definition: Acquisition debt is defined as the mortgage debt used to buy, build, or substantially improve a qualified residence. The amount of interest on this acquisition debt that is deductible depends on whether the debt is within the limits set by the IRS and how the property is used.

  2. Loan Amount: Paula and Lincoln purchased the home for $700,000. Assuming this amount represents the entire mortgage and that it has not been refinanced, the acquisition debt would still be recognized as $700,000.

  3. Property Use: Since Paula is the one living in the home and has continued to make mortgage payments, she is considered to be maintaining ownership and using the property as her primary residence.

  4. Interest Deduction: According to IRS rules for mortgage interest, a taxpayer can generally deduct interest on residential mortgages up to $750,000 of acquisition debt as of the 2017 Tax Cuts and Jobs Act (TCJA). Since the acquisition debt in this case was $700,000, Paula would be able to deduct the interest on the entire amount.

  5. Filing Status and Separation: Since Paula is filing as "Married Filing Separately" and still legally married to Lincoln (but living apart), the relevant tax rules still allow her to deduct mortgage interest on the home she is living in. The fact that Lincoln refused to file jointly does not affect her ability to deduct the mortgage interest as long as she is making the payments.

Given these considerations, the interest on the entire acquisition debt of $700,000 is deductible on Paula's tax return for 2023, provided she makes the mortgage payments and the interest is on the acquisition debt for a loan secured by her primary residence. However, it is essential to keep documentation of the payments made in case of any tax audit.