Tax and Money Tip of the Week:
Deduct Interest on Home Never Built
October 24, 2012 | No. 115

In a recent court case (TC Summ OP.2001-17) the Tax Court allowed an interest deduction for a house that was never built. A married couple took out a loan and bought a beachfront home, tore it down and planned to build a new house on the site. However, they could not do so until a state environmental agency granted them a permit. That process dragged on for two years. By that time, the local real estate market had crashed and the couple couldn’t get a loan to cover the construction costs, so they sold the land at a loss.

Tax rules state that mortgage interest is deductible on a loan for 24 months after construction begins or for 24 months after the teardown date. The court ruled that deducting interest on a loan for a home under construction doesn’t condition deductibility on the house’s completion. And in this case, the home was never built because of unforeseen circumstances that were well beyond the couple’s control. Therefore, a mortgage interest deduction was allowed on the original acquistion loan.

The rule that disallows a mortgage interest deduction after the 24-month period ends remains as nondeductible personal interest.

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Mark Vitek, CPA/PFS, CFP®
…until next week.