Mortgage Interest Deductible on House Never Built?

So you borrowed a bunch of dough to construct that mansion which you envisioned as your residence, but ran into complications regarding the building.  Is the interest deductible even though the manse didn’t ever materialize?

“Yep,” saith the Tax Court, in a decision which just came down last week.  Indeed, in the Rose case, the Court held that folks could deduct qualified residence interest on a vacation home that was never even built!

Mr. and Mrs. Rose had spent about $1.5 million to purchase some nice beach front property in Florida, borrowing about $1.3 million of the total.  But due to a bunch of environmental hassles (a la TRPA?) the taxpayers weren’t able to get their building permit until almost two years later.  And further, due to other credit market conditions, they were not able to secure their construction financing.

So they eventually sold the property (at a substantial loss) but nonetheless had deducted the “home mortgage” interest associated with the land for the two year period of the ordeal.

“Not so fast,” claimed the Revenooers on audit – we’re sorry you sustained a loss, but where did you get the idea you qualified for home mortgage interest deductions?  “Disallowed!”  Send about $40,000 in tax deficiencies back to the IRS coffers!

But the Tax Court viewed the picture as if the Roses’ planned for new house and it was, indeed, “under construction” because of the fact that the sellers from whom they bought the property had scrupulously demolished the building which previously stood on the property, and the significant effort the Roses put into the new building permit process.

The Court also pointed to IRS’ own regulations which allow for the deductibility of home mortgage interest with respect to a residence “under construction” for a 24 month period, even though no house was ever built or ready for occupancy by the 24th month, as long as the taxpayers were doing their best to get the job done.

And from our “Why not privatize Social Security” department came word, recently, that the notion has actually worked very well, thank you, in several Texas counties in recent years.

As reported recently in the Wall Street Journal, three Texas counties had long since opted out of the Social Security system, by allowing workers to create personal retirement accounts.  “Now, 30 years on,” quoth the WSJ, “County workers in those three jurisdictions retire with more money and have better death and disability benefits.  And those three counties–unlike almost all others in the United States–face no long-term, unfunded pension liabilities.”

The WSJ notes that over the last ten years, the accounts have earned between 3.75% and 5.75% every year, with the average around 5%.  And based on all of this, calculations show that a high income worker who made the maximum contribution every year would expect to collect between $5,000 and $6,000 per month in retirement, as opposed to $2,500 per month from Social Security.

Privatization anyone?

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult you CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at at http://blog.nolo.com/taxes.

Comments - Mortgage Interest Deductible on House Never Built?

  1. Brooke
    • 5 year ago.

    This is great information. I have a friend that is in the same predicament. She bought property on Badin Lake in NC and now is unable to build on it due to environmental issues. Of course, she didn’t know about any problem when she bought it, all that came about afterwards. So she’s just been making the payments but can’t build on it and now can’t sell it due to the market being so bad. I sent her this post and hope she’ll read it and it will help save her some money! Thanks so much for sharing this information. I’m sure it will help lots of people!

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