Mortgage Interest Deduction on Sale of Second Home Held for Investment Purposes

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Mortgage Interest Deduction on Sale of Second Home Held for Investment Purposes

A taxpayer can deduct mortgage interest on a second home, even when they do not have deductible interest from a primary home. Regulation 1.163-10T(p) defines "Qualified Residence" for the purpose of the mortgage interest deduction. It defines "qualified residence" as the taxpayers principal residence OR the taxpayers second residence. You do not have to have a principal residence qualifiy for the deduction to be allowed a deduction on a second residence. (Also See IRS field service advice 200137033).

The address of the property on the 1098 might clue the IRS into the fact that it is a second residence (Since it differs from the taxpayers address on the return). It is the taxpayers intent at the time of the exchange that controls whether or not the property is considered held for investment. (Revenue Ruling 57-244). Can you think of any means by which the taxpayer can demonstrate that the property was held for investment purposes in the year of exchange?

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