Taxation & Estate Planning

IRS RULES FAVORABLY ON RESIDENCE INTEREST DEDUCTIONS

By Charles Rubin

Generally, interest paid by a taxpayer on personal items is not deductible. However, the Code allows an interest deduction for "acquisition indebtedness" for a qualified residence of a taxpayer for up to $1 million of indebtedness. A taxpayer may also deduct interest on up to $100,000 of "home equity indebtedness."

If a taxpayer incurs a mortgage debt on a qualified residence of over $1 million when he buys the residence, clearly he can deduct interest on the first million dollars of debt. Can he use the "home equity indebtedness" provisions to obtain an interest deduction on the first $100,000 over the first million dollars of debt? Until now, the answer was no, at least according to 2 Tax Court Memo decisions and a 2009 Chief Council Advice.

Happily for taxpayers (or at least for those that can afford to take on mortgages in excess of $1 million), the IRS has reversed its position and will now allow the use of the "home equity indebtedness" provisions for interest on the first $100,000 of acquisition indebtedness in excess of $1 million already allowed. The IRS based its decision on the fact that there is no provision in the Code that restricts "home equity indebtedness" to indebtedness not incurred in acquiring, constructing, or substantially improving the residence.

It is not often that the IRS reverses both itself and the Tax Court in a manner favorable to taxpayers. This is something of an early holiday gift for sure.

For any taxpayers that are eligible for additional interest deductions under these rules for prior open tax years, they should consider filing an amended tax return to obtain the benefit of this ruling.

Revenue Ruling 2010-25

Full post as published by Rubin on Tax on October 16, 2010 (boomark / email).