Second Home Mortgage Interest

[JohnH]

Interesting little quirk here - maybe someone has seen this before and can steer me right before I research it further.

For several years, T/P has been deducting interest on primary residence and also interest paid on a deeded time share as a second residence. This year the T/P began building a new home, so now they have mortgage interest on the primary residence, time share, and the construction loan on the new home. I'm assuming he can just stop considering the time share as a second residence and deduct the interest on the home under construction as a second residence. Am I right?

[Wayne Brasch]

Interesting little quirk here - maybe someone has seen this before and can steer me right before I research it further.

For several years, T/P has been deducting interest on primary residence and also interest paid on a deeded time share as a second residence. This year the T/P began building a new home, so now they have mortgage interest on the primary residence, time share, and the construction loan on the new home. I'm assuming he can just stop considering the time share as a second residence and deduct the interest on the home under construction as a second residence. Am I right?

I believe that construction loan interest should be added to the cost of the property during the construction period, not currently deductible.

Wayne Brasch

[jklcpa]

Yes, when TP has multiple 2nd homes, TP can switch which is considered the 2nd home for deduction purposes. Normally, the home elected as 2nd residence is deducted for entire year. Code provides 3 circumstances where a partial year could be used.

If you have Kleinrock, it has a good summary of the basics in the 1040 compliance handbook at 13.6 "qualified residence interest" to use as a starting point for further research, if needed.

Also, here's some info from that same section on homes under construction:

Home under construction

A house under construction is a qualified residence for a period of 24 months provided that the house becomes a personal residence when it becomes ready for occupancy. Thus, interest on a construction loan is deductible as qualified residence interest. However, before construction, interest incurred on the construction debt is non-deductible personal interest.

Reg Sec 1.163-10T(p)(5)

[JohnH]

Thanks for the replies.

I had the 24-month rule figured out, including the importance of actually occupying the house when it is completed, but had not been able to nail down whether the T/P could make a year-by-year choice on which home constitutes the 2nd home when there was a precedent already in place. This was a big deal in this case. $1,200 interest on the time share vs $25,000 interest on the home under construction.

The Sec 163 reference was right on target - I appreciate that. Reading down to (h)(4)(A), I find that the taxpayer can make the determination of which is the 2nd residence and each year stands on its own.

[TAXBILLY]

Pub 936 might also be of help.

taxbilly