Land Investment Converted to Personal Use

[solomon]

Person purchases a piece of land for investment purposes. The funds for purchase come from a loan which is secured by the land. The interest on the loan was deducted as investment interest - less than net investment income.

Three years later, the person decides to build a primary residence on the land and pay out of personal funds all construction costs. However, there is still a loan on the original piece of land on which interest is being paid.

Do the tracing rules prevent anymore interest deductions on the land or can it be treated as acquisition debt? If it can not be treated as acquisition debt and there were two parcels, could the one on which the house does not reside still be considered investment interest? Thanks.

[Kram BergGold]

My view

From your description there are two lots. The one that is not being built on I would continue treating as investment property and deduct investment interest. From the date the taxpayer changed his mind and started thinking of the other lot as a place he was going to build a residence I would deduct the interest as home mortgage. However there is something about 24 months that may resrtict his deduction. You should look this up in TTB.

[solomon]

Yes

I know about the 24 month construction period but was uncertain about changing from investment interest to acquisition debt.

[Gene V]

From the date, the taxpayer changed his mind and started thinking of the other lot as a place he was going to build a residence I would deduct the interest as home mortgage.

From reading previous post on interest tracing, I would say from the date the taxpayer changed his mind and started thinking of the lot as a place to build his residence-this would be personal interest and not deductible, when he starts to build his house- it would then be mortgage interest.

[OldJack]

Once the owner of the lots has considered it as residential property I see no problem with deducting it as home mortgage interest. I expect both lots are financed in one loan and if they are adjoining lots with the owner intending to use both as part of his residence I would treat the interest on both as home mortgage interest. The owner should make sure the loan company reports it as mortgage interest. Of course as you have said there is the 24 month factor to consider.

[Gene V]

Once the owner of the lots has considered it as residential property I see no problem with deducting it as home mortgage interest. .

This is where I got my answer from

http://www.thetaxbook.com/forums/showthread.php?t=5370&highlight=interest+land

[Bees Knees]

IRS Pub 936 says:

Home under construction. You can treat a
home under construction as a qualified home for
a period of up to 24 months, but only if it be-
comes your qualified home at the time it is ready
for occupancy. The
24-month period can start any time on or
after the day construction begins.

Note that it does not say you can treat the land the home is built on as a qualified home prior to the time construction begins. Therefore, any interest paid on the land prior to the time construction begins is not qualified home mortgage interest.