J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

15.4 Home Construction Loans

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 ...