One of the most popular and well-known advantages of home ownership is the home mortgage interest income tax deduction. Less well known, however, are the limitations placed on this deduction. In Silicon Valley, where home values and the mortgages used to acquire those homes are significantly higher than in many other areas of the United States, these limits could have a significant impact on the value of this deduction to you. The general rule is that this deduction is allowed for interest you pay on a "qualified residence," defined as a person's principal residence together with one other residence. The second residence is often, but not always, a vacation residence; the key to whether a second residence qualifies for the deduction is usually if you have a non-commercial purpose in owning the second residence. Even for a qualified residence, however, this deduction is not unrestricted. What some of you may not know is that the amount of interest you can deduct is capped based on the principal amount of the mortgage owing. Roughly speaking, you can deduct the interest you pay on up to $1,100,000 in mortgage debt, calculated as follows: First, the amount of the deduction for "acquisition indebtedness," defined as the mortgage debt you incurred to acquire, construct, or substantially improve a qualified residence, is limited to the interest you pay on up to $1,000,000 in such debt. Second, the amount of the deduction for "home equity indebtedness," defined as any mortgage debt secured by the qualified residence other than the acquisition indebtedness, is limited to the interest you pay on the lower of (a) $100,000 in such debt, or (b) the amount of the fair market value of the qualified residence in excess of the amount of the acquisition indebtedness. Now, this is all well and good for someone who buys a $2,000,000 home here and takes out $1,000,000 in acquisition indebtedness and $100,000 in home equity indebtedness-all of the interest on this mortgage debt is deductible. But what happens if two unmarried people decide to buy a $4,000,000 home here and jointly take out a total of $2,000,000 in acquisition indebtedness and $200,000 in home equity indebtedness? You might think that each person could properly deduct all the interest on his or her $1,000,000 share of the acquisition indebtedness and his or her $100,000 share of the home equity indebtedness, but you'd be wrong. According to a recent U.S. Tax Court case, the cap on the home mortgage interest deduction would not be applied to each person's share of the debt, but would instead be applied based on the total amount of debt against the residence. In the second example given above, each person would only be able to deduct $500,000 of his or her $1,000,000 share of the acquisition indebtedness and $50,000 of his or her $100,000 share of the home equity indebtedness, effectively cutting the deduction in half. The case is Voss v. Commissioner, 138 T.C. No. 8 (Mar. 5, 2012): http://www.ustaxcourt.gov/InOpHistoric/SophyDiv.TC.WPD.pdf