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Originally published Friday, October 22, 2010 at 10:00 PM

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IRS boosts interest deductions for million- dollar mortgages

The U.S. Internal Revenue Service said homebuyers with million-dollar mortgages can deduct more of their interest payments than a federal...

Bloomberg News

The U.S. Internal Revenue Service said homebuyers with million-dollar mortgages can deduct more of their interest payments than a federal court previously allowed.

The tax agency said interest on the first $1.1 million of a mortgage can be deducted, or $100,000 more than the U.S. Tax Court allowed in cases decided in 1997 and 2000. The court had ruled that interest on the additional $100,000 could be deducted only if it was a home-equity loan used to improve, rather than acquire, a property.

"The Internal Revenue Service will not follow the decisions," the agency said Oct. 14 in a so-called revenue ruling, an administrative policy statement followed by auditors in the field. The court's rulings in the cases were "incorrect," the agency said.

For mortgages that carry a 5 percent interest rate, a taxpayer in the 35 percent tax bracket would be able to deduct an additional $6,000 in 2010 on the extra $100,000. That would be a savings of $2,100. Interest on mortgage amounts exceeding $1.1 million can't be deducted.

The U.S. Tax Court is organized under the executive branch rather than the judicial branch of government, so its opinions don't hold the same precedential value as a district or appeals court. The cases in question were Tax Court Memorandums, which are even less authoritative.

IRS auditors had followed the court's rulings, sometimes denying deductions of interest payments on the first $100,000 over $1 million in a mortgage, the agency said. The revenue ruling is intended to correct that.

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