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HelloCustomer Thank you for coming to Just Answer and allowing us to help you with your tax question. The IRS mortgage interest deduction is allowed for two homes as long as you will be residing in both (such as a main home and a vacation home). Since the home equity loan was used to buy land and to build a home that you will be residing in, the interest on the loan will be a 100% deductible, even if you are subject to the Alternative Minimum Tax. You need to be sure that you actually show progress in building your home. If you sell the land without building a home or making progress towards building a home, then the interest will not be deductible as home mortgage interest and could be viewed by the IRS as investment interest. That is based on federal tax law. I have not reviewed California law per your information, so you may need more information about California tax treatment of the interest.
One possible problem that you may need to keep in mind is that as of the 2009 tax code, home acquisition interest debt is limited to a loan of $1 million dollar. That will include the cost of the land and the home. If you exceed the $1 million dollar loan threshold, any interest on the amount greater than $1 million dollars won't be deductible.
I hope this satisfactorily answers your question. If you need further clarification, I will be happy to provide more information. Since your question is listed twice on the question list, I will arrange to have the duplicate question closed. If you did intend to list it twice, then you can relist it again. Thank you for letting me help you.
Ok so it does not matter that it is land and I am building on it for myself. So I will not be subject to the limitation of $100K, I am building on the home and now the IRS says that I am subject to limitation of $100K as I used the home equity loan and not a straight mortgage. They are disallowing the deduction, The loan is for $780,000 which is well below the $1m limitation.
The exact words of the IRS officer is: That the loan obtained in the amount of $780,000against your residence is not considered acquisition indebtness because it was not obtained for acquiring or improving such residence. Instead it is equity loan where the proceeds were used for another purpose (in this case to purchase land. Nor is it second residence as land does not qualify as residence. Because the indebtedness is home equity indebtedness, youur deduction is limited to interest paid that is attributable to $100,000 of the total debt only.
I am not sure this IRS officer knows what she is talking about and makes me nervous to go along with her findings when I explicitedly told her I had begun construction and it will be my primary residence.
Does this finding make sense?
I'm afraid the other expert's answer is incorrect, and the IRS agent's answer is correct, but not complete. The loan you describe is considered a home equity loan, as it's secured by your first primary residence to build a second residence. To the extent secured by the land or new property, it could be considered a mortgage loan if the new residence becomes "a qualified residence" (your main residence, or the designated second residence) within 24 months.
See the flowchart on page 3 of IRS publication 936 (Home Mortgage Interest Deduction), where one of the questions is:
Were all of your home mortgages taken out after 10-13-87 used to buy, build, or improve the main home secured by that main home mortgage or used to buy, build, or improve the second home secured by that second home mortgage, or both?
As you fail that question, some of the interest is considered "home equity" interest (deductible only up to $100,000) rather than "acquisition interest" (deductible up to $1,000,000).
ok so basically what you are saying is that I cannot deduct all the interest, I am limited to $100k. So the iRS is correct? So I lose?
I find that sttrange as this is my primary residence and I didnt just buy land to keep it.
I looked at the chart and seems to be in doubt for me.
So in plain nutshell I cannot deduct all and need to pay back the deduction that I took?
No other loopholes?
Also, need to say that I have refinanced this loan. I am very confused. When I took this loan I ws told I could deduct it fully up to $1m as I am building formy primary residence.
I did a refinance on my home.I even called the iRS as well.
Is there no defense?
My property was debt free. I took out a home equity mortgage of $780,000 to purcahse the land. The land is used to build my primary residence.
I got the home equity loan in May 2005 from First Federal based on the equity from my primary residence, a sub zero loan, and refinanced to mortgage loan in 12/2006 from Citi Mortgage.
The full intention is to build my primary residence, which I am still constructing.What other info do you need?
Let me clarify, I took it as mortgage interest deduction, that is NOT ALLOWED. Correct for the entire $780,000, it is limited to $100K. So IRS is Correct?
I was resaerching somewhat and so what does this mean?
Home equity debt means any loan whose purpose is not to acquire, to construct, or substantially to improve a qualified home, or any loan whose purposes was to substantially improve a qualified home but exceeds the home acquisition debt limit.
So basically I acquired the loan to construct so I should qualify, as it does not construe, so should be considered an acquisition indebtedness?
Some more research. What does all this mean by IRS:
In a recent memorandum, the IRS Office of Chief Counsel reinterpreted the definition of acquisition indebtedness secured by a residence.
Taxpayers are normally allowed to deduct interest on two categories: acquisition indebtedness and home equity indebtedness. Acquisition indebtedness is indebtedness to acquire, construct, or substantially improve a residence, but the amount cannot exceed $1 million. Home equity accounts for indebtedness other than acquisition indebtedness, but the amount cannot exceed $100,000.
Under the IRS's new interpretation, the $1 million limit is an element of the definition of "acquisition indebtedness." Any amount of a mortgage in excess of $1 million is not acquisition indebtedness because, by definition, only the first $1 million is acquisition indebtedness.
The word missing Acquisition indebtedness is indebtedness to acquire, construct, or substantially improve a residence, but the amount cannot exceed $1 million.
IS what the IRS say in the line that I purcahsed land. She failed to say that I wanted to build my home. Or does that even matter if she missed some words.
IS what the IRS say in the line that I purcahsed land. She failed to say that I wanted to build my home. Or does that even matter if she missed some words. Also she missed Construct. Does that even matter? The law is what the law is?
What does all this mean?
The amount of mortgage interest you can deduct each year is limited. There is one limit for loans used to buy or build a residence -- called "home acquisition debt." And there is another limit for loans not used to buy or to build a residence -- called home equity debt. All loans, whether secured by your main home or your second home, are subject to the same overall limitations.
Home Acquisition DebtYou may not deduct interest on more than $1,000,000 of home acquisition debt for your main home and secondary residence. Home acquisition debt means any loan whose purpose is to acquire, to construct, or substantially to improve a qualified home. The limit is reduced to $500,000 if you are married filing separately.
Home Equity Debt buy, and both having reasonable knowledge of
all relevant facts. Sales of similar homes in your
If you took out a loan for reasons other than to area, on about the same date your last debt was
buy, build, or substantially improve your home, it secured by the home, may be helpful in figuring
may qualify as home equity debt. In addition, the FMV.
debt you incurred to buy, build, or substantially
improve your home,
I am still confused.
No the property are not side by side. I refinaced the home equity debt as mortgage loan in 12/2006. The loan is no longer secured by theresidence I am living in such as home equity. It says in all research I have done that if the home equity was not to improve, build or acquire than the entire balance is deductible. DO I NOT FALL IN THESE CATEGORIES> So, botXXXXX XXXXXne I need to pay back the IRS? Correct?
Can you explain why I dont fall within these IRS guidelines
Acquisition debt is debt acquired after October 13, 1987 to buy, build, or substantially improve your main residence or a qualified second home. A "substantial improvement" is one that adds value to the home, prolongs the home's useful life, or adapts the home to new uses. The amount of interest that you can deduct on acquisition debt is limited to $1 Million ($500,000 if Married Filing Separately) of principal. Qualified acquisition debt also cannot exceed the cost of the home plus the cost of any "substantial" improvements.Home equity debt - debt secured by a principal residence or second home that is not used to buy, build, or substantially improve the property. Why dont I fall here. I used to buy land to build so I should b eable to deduct all?
Why dont I fall under these IRS guidelines
You may not deduct interest on more than $100,000 of home equity debt for your main home and secondary residence. Home equity debt means any loan whose purpose is not to acquire, to construct, or substantially to improve a qualified home, or any loan whose purposes was to substantially improve a qualified home but exceeds the home acquisition debt limit.
Acquisition debt is debt acquired after October 13, 1987 to buy, build, or substantially improve your main residence or a qualified second home. A "substantial improvement" is one that adds value to the home, prolongs the home's useful life, or adapts the home to new uses. The amount of interest that you can deduct on acquisition debt is limited to $1 Million ($500,000 if Married Filing Separately) of principal.
I would qualify for 100% deductible under these guidelines? If no, why not?
So what are you saying. The IRS is wrong and that I can deduct 100% of the loan interest?
I am even more confused. The refinance occured for one month in Dec2006.
So I just want to know the interest from May 2005 to Dec 2006 when I was with First federal is definitely only deductible for the $100K? The interest for Dec 2006 is small. That is probably mute at this point.