My husband and I sold our home in May 2015. We paid cash for a building lot. Now we have a construction loan. Can we deduct that interest on our taxes? We are not living on the property yet (renting nearby). Our tax preparer didn't know, and the IRS couldn't give me an answer.
Generally, mortgage interest is deductible if the loan is a secured debt on a qualified home. In situations where the home has not yet been built, the home under construction is treated as a qualifying home for a period of up to 24 months if it becomes your main or second home at the time it is ready for occupancy.
If the construction period exceeds 24 months, the interest for the remaining months is considered personal interest, which is not deductible. Construction loan proceeds must be traceable to home construction expenses, including the purchase of a lot.
Interest on construction loans may be qualified residence interest if the above conditions are met. Please review your situation with your tax preparer or advisor to determine if you meet these conditions before deducting any interest.
Answered by: James G. McGrory, CPA, and Stephanie K. Otake, CPA, are with Drucker & Scaccetti in Philadelphia.