Mortgage Interest

[peggysioux]

Taxpayer received a 1098 for mortgage interest from a construction loan. Began building in 2006 and carrying over to early part of 2007. He has not yet paid any payments on his construction loan and interest is being added to his loan so that when home is finished in 2007, taxpayer will roll the construction loan and mortgage interest accrued into new loan. Is the mortgage interest from 1098 deductible in 2006 if he did not pay on it in 2006? I believe it is, but wanted to confirm.

Thanks!

[JG EA]

Time limit

There is a time limit. See publication 936 page 8. It explains the limits. Debt that does not meet the time limit may be qualified home mortgage interest later. There are several examples on that page that may help you.

[peggysioux]

Mortgage Interest - Construction Loan

Taxpayer falls within the 24 month limit; but my question is that he has not had to make any payments as of yet on the construction loan, but interest has accrued. I did review pub. 936, but did not see an example that fit taxpayer's situation. Taxpayer accrued $18,000 in mortgage interest that will just roll into loan and when construction is completed, taxpayer will refinance and include the accrued interest in new loan. He received a 1098 showing the $18,000 interest and wants to include. Any additional thoughts would be appreciated.

[jerome]

It depends on the accounting method. Form 1098 does not automatically give you the right to deduct anything. If the taxpayer is under the accrual method of accounting, then accrued interest is deductible. If the taxpayer is under the cash method of accounting, then you only get to deduct interest actually paid.

[peggysioux]

Mortgage Interest - Construction Loan

Taxpayer is on cash basis and he is building his personal residence. If he can not claim this year being he is on cash basis and then rolls the accrued interest into new loan when construction is completed, does the interest accrued then become a part of the total expense of the house and a part of the basis?

[Joe Btfsplk]

Accrued interest is not deductible by cash basis taxpayer

It does not matter when it accrues. Eventually it will be paid and that is when you deduct it. The accrued interest may be added to the principal, but cannot be deducted. Only the interest paid on the principal (including any accrued interest added to the principal) would be deductible.

Assume there is $ 10,000 accrued interest and $ 100,000 cost of building a house and interest is 6% per annum.. The first interest payment would then be 6%/12 X110,000 or $ 550.