Interest on a home construction loan may be fully deductible for a period of up to 24 months while the home is under construction. Fot the 24-month period starting with the commencement of construction, the loan is considered acquisition debt subject to the $1 million ceiling (15.2), provided that the loan is secured by the lot on which construction is taking place and the home is a principal residence or second home when it is actually ready for occupancy. In one case, the Tax Court allowed an intrerest deduction under the 24-month construction period rule even though the home was never built; see Example 4 below.
According to the IRS, if construction begins before a loan is obtained, the loan is treated as acquisition debt to the extent of construction expenses within the 24-month period before the date of the loan. In determining the date of the loan for purposes of this 24-month rule, you can treat the date of a written loan application as the loan date, provided you receive the loan proceeds within 30 days after loan approval.
Interest incurred on the loan before construction begins is treated as nondeductible personal interest (see Example 1 in this section). If construction lasts more than 24 months, interest after the 24-month period also is treated as nondeductible personal interest.
Interest on loans taken out within 90 days after construction is completed may qualify for a full deduction. The loan is treated as acquisition debt to the extent of construction expenses within the last 24 months before the residence was completed, plus expenses through the date of the loan (see Example 2 below). For purposes of the 90-day rule, the loan proceeds generally are treated as received on the loan closing date. However, the date of a written loan application is treated as the loan date if the loan proceeds are actually received within 30 days after loan approval. If a loan application is made within the 90-day period and it is rejected, and a new application with another lender is made within a reasonable time after the rejection, a loan from the second lender will be considered timely even if more than 90 days have passed since the end of construction.
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