Deduct mortgage interest on three houses?

Dear Tax Talk,
I recently got married. I own two houses with mortgages, and my wife owns a house, also with a mortgage. Is there any way to deduct the mortgage interest on three houses? Could we claim the third as an investment property now? She has been renting her property on and off, and we are trying to sell her house and one of mine. We were planning on filing “married filing separately” with me deducting my two homes and her deducting her home. However, I don’t think this follows the letter of the tax code.
— Darren

Dear Darren,
Congratulations, and welcome to the world of filing taxes as a married person where the rules are somewhat different.

When you filed your taxes as a single person, you were able to deduct mortgage interest on your main home and a second home. As a married couple filing jointly, it seems that it would change, but the rule is the same. You and your wife cannot deduct mortgage interest on more than two homes. The IRS is ahead of you on your thinking that using the filing status “married filing separately” will help you keep those deductions. If you are married filing separately, you can each take into account only one home as a qualified home. However, if you both consent in writing, then one of you can take both the main home and second home into account. Keep in mind that when you file separately, you both have to itemize deductions or, alternatively, both of you must claim the standard deduction on your tax returns.

But if your wife has been renting her property, then you may be able to deduct her mortgage interest on Schedule E subject to the passive activity loss rules for rental property. Even if she has generated little to no rental income, if her property has been “placed in service,” then it is considered rental property. You place property in service when it is ready and available for rental.

Be sure and keep good records in case the IRS has any questions.

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