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Can I deduct mortgage interest that belongs to another state for virginia state tax returns

My situation is somewhat unique.

 

I personally is a VA resident; My wife lives in another state, NY. We file federal tax jointly using my VA address.

 

We itemize our federal tax returns. We own two homes, one in VA, as my principle address/home, and one in NY, as my wife's principle home.

 

when we file state return, NY would file the return as a prorated return on all deductibles, and thus we can just claim all deductibles and NY partial year will prorate it correctly.

 

However, VA tax return is different and asks for itemized deductible "only as VA resident". As I understand, I did not deduct any NY property tax on my VA return.

The mortgage interest is more interesting. On an "ideal" basis, we did not claim the full amount on our NY filing (Only 50% on NY is deducted). I am also on the NY property mortgage and title. 

 

I am unsure if I should file which of the four options below:

A, claim full amount on federal return. This way, I would have claimed tax refund for half the total mortgage interest (NY + VA) on NY return, and full tax refund on VA return, which sounded wrong.

B, claim half NY mortgage interest, and full amount of VA mortgage interest on my VA return. This way I still claimed full NY mortgage interest for the two states combined, but for my VA property I claimed full amount twice in both states.

C, claim half mortgage interest for my NY +VA properties. This sounded most reasonable and is what I planed on my state return. But I am very unsure if this is defensible (i.e., it's going to be complicated math to show to an auditor if I encounter it, as my situation is further complicated that I rented out my VA property in second half of the year and moved to another VA address as a tenant. Have to do this as I am with an VA job that requires my to be onsite. In reality, I am claiming half of my NY property interest and around 1/4 of my VA property mortgage interest, using similar line-of-thoughts as above mentioned but accounting for that I rented the property out for half a year).

D, claim only VA property mortgage interest. This, while safest, sounds unfair since I lose half mortgage interest tax credit on my NY state return.

 

I found nowhere that VA requires the mortgage interest to be within state, but only require that the payment is made during the time that I am a VA resident. It also requires that the property to be a principle or secondary home. I feel I qualify for both (payment is made during my VA resident time; I am on the mortgage; the property is my wife's principle residence and my secondary home).

 

Thanks in advance!

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3 Replies
DMarkM1
Employee Tax Expert

Can I deduct mortgage interest that belongs to another state for virginia state tax returns

First, on your federal joint return claim everything.  Next, for VA here is the VA reference for your filing status (see below for extract).  You should be filing status 3 and file a separate VA return with only your income/deductions.  You are correct it doesn't matter where the property is located; you just need to claim your portion of any itemized deductions on your resident Married Filing Separate VA return.  

 

Further, you would likely claim the rental property income/expenses on your separate VA return.  

 

"If you and your spouse filed a joint federal return, but only one of you is a Virginia resident, the resident must use Filing Status 3. When using Filing Status 3, complete your tax return as follows: (1) Compute your federal adjusted gross income as though you had filed separately on your federal return; (2) claim only the personal and dependent exemptions, itemized deductions (if claimed on your federal return), and child and dependent care expense amounts that you could claim if you had filed a separate federal return. If one spouse claimed itemized deductions, the other spouse must also. (3) Be sure to provide your spouse's name and social security number in the spaces included on the return for that information." 

 

The best way to handle filing joint federal return and a separate state return is to use a TurboTax desktop product.  There you can create and e-file your joint federal return and then create a "Mock" separate federal return with only your income/deductions that will then flow to your VA separate return.  You will not file the mock federal return and you will need to print/mail your VA return since you are not actually filing the corresponding federal return.  Here is a link that will be helpful. 

 

For NY you have the option to file a joint NY return as if both are residents.  Here is the NY reference. However, you also have the option to file a separate NY return for your spouse as well.  Again in the desktop version you can create the "Mock" federal separate return for your spouse which will flow to the NY separate return. You can create the joint NY return for comparison there in the desktop if you prefer to see which yields the best tax outcome. 

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Can I deduct mortgage interest that belongs to another state for virginia state tax returns

Very knowledgeable and awesome. Thanks!!

Can I deduct mortgage interest that belongs to another state for virginia state tax returns

Thanks again. I just wrapped up with my tax. I ended up filing married separately for both state and federal. The mortgage interest was properly pro-rated between my wife and I using the 375k limitation. It's actually great. I ended up with around $400 more in total refund, but the best part is I now am very confident with the filing. It is straightforward, and defensible..

 

I had to pay tax penalty for my wife though. $5. A price I am willing to take...

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