Have a Tax Question? Ask a Tax Expert
Section 163(h)(3)(B) defines acquisition indebtedness as follows:
("B) Acquisition Indebtedness.
(i) In general. The term "acquisition indebtedness" means any indebtedness
(I) is incurred in acquiring, constructing or substantially improving
any qualified residence of the taxpayer, and
(II) is secured by such residence."
The home equity loan secured by your residence does not qualify under the definition of acquisition indebtedness because the term is defined that the indebtedness must be secured by such residence.
Indeed you can borrow to buy build or improve and have that debt be acquisition indebtedness; but only when the borrowing is secured by that residence (or land). This is not true in your case as it was described.
The problem is that you borrowed against your current residence in order to build the future residence. So, the amount you borrowed on the current residence is not acquisition indebtedness for the future residence since the security for the note is the current residence.
There really is no recourse because of the wording of the statute. Yes, the law is what the law is and this law requires that acquisition indebtedness be secured by such residence.
I hope this helps to know what the law says even though you certainly would have liked to have a different answer.
So even though she left out the word construct, it does not matter. I refinanced the loan in 12/2006. The land is paid off 100%.
So I have to pay back the IRS?
any qualified residence of the taxpayer. So what does this mean when it says any qualified residence of the taxpayer.
It does not matter she left words off. It is the words of the law that matter and the law clearly requires that for it to be acquisition debt the loan has to be secured by that residence (or that land that is built on within 24 months).
The debt has to be secured by the property that is being acquired or constructed.
Whether you pay back the additional tax at this time or continue to try to fight the proposed change is not for me to decide. You, with the advice or your representative that has all of the facts, must make that decision.
There is no basis in the law (as was shown) for you to deduct more than the interest on up to $100,000 of debt in the scenario of securing a loan with one house and acquiring or constructing another with the proceeds from that loan.
You may very well want to decide to pay knowing what the law says.
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?
Look at the statute in Section 163(h)(3)(B) that defines acquisition indebtedness as follows:
There are two things (I) AND (II) that are needed for it to be acquisition indebtedness.
The home equity loan secured by your residence does not qualify under the definition of acquisition indebtedness because the term is defined that the indebtedness must be secured by such residence. The amount you borrowed on the current residence is not acquisition indebtedness for the future residence since the security for the note is the current residence.
You do not fit the definition part (II).
There is no doubt it is not acquisition debt, by the definition in the law.
I know you would rather hear a different answer, but the law defines what it is.
(If you want to discuss offer in compromise please start a new thread on that.)