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Can I deduct interest on my home construction loan?

September 10, 2001


Subject:  Interest on a home Building Loan
From:  Doug Hosmer
Date:  Sun, 02 Sep 2001

Sir,

Can I deduct interest on my home construction loan? The loan is secured with my current residence which I am in the process of selling, so I can move to my new home. Thanks in advance for the advice.

Best regards,

Doug

Answer

Date:  Fri, 7 Sep 2001

Hello Doug,

In order to be deductible as residential mortgage interest, the loan must be (1) incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (2) secured by the residence.

Since your construction loan is not secured by the residence for which the construction is being done, it does not qualify under the acquisition indebtedness rules. (Internal Revenue Code Section 163(h)(3)(B) and IRS Notice 88-74.)

Under the regulations, when you establish the permanent financing for your new residence, debt attributable to construction incurred during the 24 months before completion or paid 90 days after completion will qualify as acquisition indebtedness for the permanent financing, provided it is secured by the new residence. (Notice 88-74, Treasury Regulations Section 163-8T.)

Your current financing might qualify under the $100,000 home equity indebtedness rule of IRC Section 163(h)(3)(C). Bear in mind the home equity indebtedness is not deductible for AMT.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

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Can I deduct interest on my home construction loan?

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