My client wants to borrow money from a relative to purchase land for his new primary residence. The way I read things, interest incurred on the land from date of purchase to the date construction begins is not deductible. I have never encountered this before so I want to make sure I understand this.
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My two Cents
I think he could make all of the interest deductible by erecting quickly a tent with a sleeping bag in it (sleeping quarters), the cheapest cooking arrangement he can think of such as an alcohol or propane stove or even a fire ring, and some kind of toileting facility such as a portapotty or outhouse. The code is clear that these are the minimum requirements for a home in order to be able to deduct mortgage interest. Of course it also has to be his main home or his second home so if he already has two homes he has to stop writing off mortgage interest on one of them.
Note that it is not necessary that he actually use the arrangements made. He just has to make them. -
Sounds like a problem to me
It is not a construction loan, it is a loan that the borrower will use to buy some land. The loan probably will not be secured against the property. I might add a big mistake for relatives making the loan.
Look at the example on page 4-13 in TTB.Comment
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I was assuming
that the loan was secured by the land and by the house to be built on the land.Comment
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Either way
when money is borrowed from a relative, even to purchase outright a primary residence, the interest paid isn't deductible unless the relative records the mortgage under state law and use the home as collateral to file as a lienholder. In addition, it would need to fit the usual rules for a bona fide loan: i.e have a reasonable interest rate, a defined term, etc. TTB 4-11 talks about home mortgage interes paid on secured debt."Congress has spoken to this issue through its audible silence."
Anyone ever notice they beat the daylights out of the definition of a child, but they don't spend much time at all defining "parent"?Comment
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