Discussion:Mortgage interest 2nd home

Interest on what portion is deducitble?

He hasn't secured a mortgage on the 2nd home yet but is going to do that. Construction ended 25 months ago. When he gets that mortgage how much is deductible?

Thanks. It's been a bad day.

under 481 §163(h)(4)(A)(i) interest on a 1st and 2nd qualified residence are deductible. A quailified residence, if under construction, MUST be completed in under 24 months. If the 2nd residence was completed and the entire mortgage is a lien on the 1st home it will qualify as a qualified residence and NOT fall under equity interest rules.

Cite from BNA follows... Two types of home mortgage debt produce deductible qualified residence interest; (1) “acquisition debt,” which is secured debt used to purchase, build, or substantially improve a qualified residence, and (2) secured “home equity debt” up to the lesser of $100,000 or the amount of equity in the residence (fair market value minus the principal amount of the mortgages on the residence). See ¶2330.02.H.3.e, below. Interest on acquisition debt is deductible as long as the debt does not exceed the cost of the residence and its improvements, up to a maximum of $1,000,000. See ¶2330.02.H.3.d, below. end cite

Sounds as if the LOC debt is in fact converted to acquisition debt IF (a big IF), the 2nd home qualifies as a residence.

That may help.

Cite

The taxpayer's “qualified residences” are the taxpayer's principal residence and one other residence chosen and used by the taxpayer as a residence. The taxpayer can have up to two qualified residences. 484 A residence includes a house, condominium, mobile home, boat, or house trailer that contains sleeping space and toilet and cooking facilities. Personal property that is not a fixture under state law cannot be a residence. 485 In certain cases, time-shares, residences under construction, and stock in cooperative housing corporations can be residences (see ¶2330.02.H.3.b.(2) - (4), below). A residence may be a qualified residence even if the taxpayer does not hold legal title (that is title and the mortgage, if any, is held by another person). 486

end cite

Is the interest on the $300K mortgage deductible?

(B) Acquisition indebtedness

         (i) In general
           The term acquisition indebtedness means any
         indebtedness which -
             (I) is incurred in acquiring, constructing, or
           substantially improving any qualified residence of the
           taxpayer, and
             (II) is secured by such residence.

I interpret the "any indebtedness" and "any qualified residence" to mean either the 1st or 2nd.

I think you are fine here.

Taxpayer has a residence with no mortgage against it, FMV $500,000. Taxpayer take out a home equity of $200,000 against primary residence and buys 2nd home. No rental involved.

Is mortgage in interest on $100,000 or $200,000 deductible?

Read the code section and I think you will find it doesn't have to be. Secured by ANY residence is what it says.

(I) - is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and

(II) - is secured by SUCH residence.

(I) the fair market value of such qualified residence, reduced by

(II) the amount of acquisition indebtedness with respect to such residence."

Definition 'such' Of this kind or of a kind specified or implied. http://www.thefreedictionary.com/such

It strikes me how often Tax Court judges go to the dictionary to define words.

I read it slightly differently than you and I believe the law would support me. It says SUCH residence, I agree but such residence is ANY qualified residence. It does NOT say it must be THAT residence only must be one of the two. We are still in compliance. There may be case law, rulings that define this differently than my reading and of ourse that will over rule. But my reading is that ONE residence, will work to have a debt for 2 as long as the second is a qualified residence as well as the first.

Good discussion,

"Qualified residence interest is defined in § 163(h)(3) as any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Section 163(h)(3)(B) defines acquisition indebtedness as any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence. Section 163(h)(3)(B) also provides that acquisition indebtedness includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of acquisition indebtedness, or refinancing of acquisition indebtedness, but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. Under § 163(h)(3)(B)(ii), the aggregate amount of acquisition indebtedness for any period cannot exceed $1,000,000 (or $500,000 in the case of a married individual filing a separate return).

The term “qualified residence” is defined in § 163(h)(4)(A) as the principal residence (within the meaning of § 121) of the taxpayer and one other residence of the taxpayer that is selected by the taxpayer for the taxable year and that is used by the taxpayer as a residence (within the meaning of § 280A(d)(1))."

If I read Rev Rul 2001-11 I do not walk away with the notion that a mortgage must be secured only by the home (1st or 2nd) that it acquires or improves.

What do you think?

Rev. Rul. 2005-11 provides guidance for the AMT adjustment for mortgage interest where the debt was refinanced more than once.

"The $300,000 debt is also incurred to construct the residence. $100,000 of the debt is treated as debt incurred to construct the residence because was used to refinance debt incurred to construct the residence; the remaining $200,000 of the debt is treated as debt incurred to construct the residence because it was incurred within 90 days after the residence was complete, and construction expenditures of at least such an amount were incurred within the period beginning with the date 24 months prior to the date the residence was complete and ending with the date the debt was incurred. The entire $300,000 debt is acquisition indebtedness because it is also secured by a qualified residence. Therefore, all of the interest on the debt is deductible as qualified residence interest.

What's interesting to me is the IRS here only required the acquisition indebtedness be secured by "a" qualified residence not secured by "such" residence.

Somebody in this thread said he hoped he was wrong because he liked the other answer better. That's where I am.

I told this to a client who is a really important lawyer & he responded that it's all OK because we can simply deduct everything on the forms 1098 and the IRS will never know the difference. (I didn't but he didn't seem to notice.)

Back to work.

http://taxalmanac.org/index.php/Discussion:Home_Acquisition_Debt_vs_Home_Equity_Debt