Syndicate Rules May Create Problems for Small Businesses and §163(j) Interest Limits

An exception to the general rule that small businesses are exempt from the §163(j) limits on the deduction for business interest applies to any entity that is a “tax shelter.”  The most likely problem to arise that many may not initially notice is that the organization might meet the definition of a syndicate.

On January 11, 2019, Tax Notes Today published a story that featured comments from Tony Nitti, CPA that discussed the potential issues that may arise with the interest deduction limitation under §163(j) and the syndicate rules.

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IRS Issues News Release to Clarify That Loans a Bank Calls a Home Equity Loan May Still Be Deductible as Mortgage Interest After TCJA

In News Release IR-2018-32 the IRS sought to deal with what appears to be a widespread misunderstanding of how the home mortgage interest deduction works under the revisions passed as part of the Tax Cuts and Jobs Act.  The IRS points out that merely because a lender refers to a loan as a “home equity” loan, that does not mean the interest will not be deductible in 2018, so long as proceeds of the loan are used to acquire or substantially improve the residence.

Under IRC §163(h)(3)(F), only “acquisition indebtedness” (as defined by IRC §163(h)(3)(B)) will be deductible, and “home equity” indebtedness (as defined by IRC §163(h)(3)(C)) will not be.  Too many taxpayers, reporters and, in this author’s experience, even tax advisers are ignoring the “as defined by” clauses above and instead go directly to using loan labels to determine deductibility.

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IRS for the Third Time Extends Safe Harbor Method for Recipients of Hardest Hit Fund Relief Through 2021

The IRS in Notice 2017-40 again extended the time period, this time through 2021, that taxpayers may use the safe harbor method of reporting HFA mortgage relief originally granted in Notice 2011-14.  Notice 2015-77 had extended until the 2017 tax year the safe harbor method originally provided for in Notice 2013-7 of reporting payments made on a home mortgage that had received relief from a state housing agency from the Hardest Hit Fund (HFA Hardest Hit Fund). 

The new notice also extends relief from penalties related to information returns for mortgage services and state housing agencies due to payments made under the program.

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IRS Acquiesces in Ninth Circuit View That Home Mortgage Interest Limitation is Applied on Per Taxpayer Basis

In Action on Decision 2016-02 the IRS decided to acquiesce in the result in the case of Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), rev'g Sophy v. Commissioner, 138 T.C. 204 (2012).

The original decision was reported last year on this site (Home Mortgage Debt Amount Limitation Applies on a Per Residence, and Not Per Taxpayer, Basis per Tax Court, But Ninth Circuit Overrules and States It Is a Per Taxpayer Limit).  That case had looked at whether unmarried individuals who jointly owned a residence each were allowed to claim home mortgage interest deductions on up to $1.1 million of debt, or whether that $1.1 million limitation applied on a per residence basis.

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Taxpayer Fails to Show He Was Either Equitable Owner of Residence or That He Actually Paid Mortgage Interest Claimed

In order to claim a deduction for interest paid that is otherwise deductible, generally a cash basis taxpayer must both actually pay the interest in question (since that controls the timing of deductions in that case) and be liable on the debt (since only a taxpayer’s own expenses are going to generally be deductible). However even if one is not directly liable on a mortgage on a principal residence, if the taxpayer is the legal or equitable owner of the property in question the taxpayer can still claim a deduction on that debt. [Treasury Reg. §1.163-1(b)]

In the case of Jackson v. Commissioner, TC Summary Opinion 2016-33, the taxpayer claimed to be the equitable owner of a residence he shared with his girlfriend in which they both lived and that he had paid amounts towards the mortgage that should enable him to claim interest deductions despite the fact that the Form 1098 was issued in his girlfriend’s name and he was not listed either on the deed for the property nor as liable on the debt.

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Memo Analyzes Proper Deduction of Mortgage Interest Where There are Multiple Obligors on the Note

Dealing with a home mortgage interest deduction when the property is held by more than one person and those individuals are paying on the mortgage but not filing a joint income tax return creates issues when preparing the tax returns for those individuals.  While taxpayers often believe the rule is “we can split it however we want,” Chief Counsel Advice 201451027 reminds us that there are rules that apply in these situations.

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