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Subject:  home improvement
Date:  Thu, 25 Jul 2002
From:  Jane

Hi. I want to refinance and take out cash to do a major home improvement. The construction probably won't start until November, but I might do the loan now because the rates are so great. Can I deduct the interest I pay before and during the construction?

Thanks.
Jane

Answer

Date:  Wed, 31 Jul 2002

Hello Jane,

The rules for deduction of interest relating to a residence are among the most complex in the tax law. This is a shame, since this deduction is one of the most common ones on individual income tax returns.

The rules for this type of a transaction are outlined in Temporary Treasury Regulations 1.163-10T and Notice 88-74.

Interest for debt incurred up to two years before the completion of construction of a major improvement or up to 90 days after completion can be qualifying residential indebtedness.

It appears you may borrow the money before the work is started. I recommend that you deposit the funds in a separate bank account and pay the construction bills from that account. Be sure the construction is completed within the two-year window.

Also, remember the construction loan must be secured by the residence for which the construction is done, and that you may only deduct qualified residential interest for your principal residence and a second residence.

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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