In October 2010, the IRS issued Revenue Ruling 2010-25 and addressed
the issue of whether mortgage indebtedness, in excess of $1,000,000, can
constitute "home equity indebtedness" within the meaning of § 163(h)(3)
of the Internal Revenue Code. Under §163(h)(3), acquisition and home
equity indebtedness can be incurred by a taxpayer to acquire, construct,
or substantially improve a qualified residence. This benefit can add an
extra tax decution to Sarasota, Bradenton and Lakewood Ranch Florida
residents with mortgages in excess of $1,000,000.
In 2009, a taxpayer purchased a principal residence for $1,500,000.
The taxpayer paid $300,000 and financed the balance ($1,200,000) through
a loan secured by the residence. Under §163(h)(3)(B)(ii), the taxpayer
was limited to $1,000,000 being treated as acquisition indebtedness. In
addition, §163(h)(3)(C)(i) provides that home equity indebtedness is
any indebtedness secured by a qualified residence other than acquisition
indebtedness, to the extent the fair market value of the qualified
residence exceeds the amount of acquisition indebtedness on the
residence. Section 163(h)(3)(C)(ii) further limits the amount of
indebtedness treated as home equity indebtedness to $100,000.
In issuing the ruling, the IRS concluded that the taxpayer may
deduct, as interest on acquisition indebtedness under § 163(h)(3)(B),
interest paid on $1,000,000 of the $1,200,000 indebtedness used to
acquire the principal residence. The taxpayer also may deduct, as
interest on home equity indebtedness under § 163(h)(3)(C), interest paid
on $100,000 of the remaining indebtedness of $200,000.
The ruling reflects a change from the previously followed decisions in Pau v. Commissioner, T.C. Memo. 1997-43 [enhanced
version available to lexis.com subscribers]; and Catalano v. Commissioner, T.C. Memo. 2000-82 [enhanced
version]. The IRS found that the holding in Pau
was based on "the incorrect assertion that taxpayers must demonstrate
that debt treated as home equity indebtedness was not incurred in
acquiring, constructing or substantially improving their residence."
The IRS reasoned that "home equity indebtedness," as defined under IRC §
163(h)(3)(C), does not contain that restriction.
View more information from Marc J. Soss at http://www.fl-estateplanning.com/ and http://info.fl-estateplanning.com/
Marc Soss' practice focuses on estate and tax planning; probate and
trust administration and litigation; guardianship law; and corporate law in
Southwest Florida. Marc is a frequent contributor to LISI and has published articles and
been quoted in the Florida Bar, Rhode Island Bar, North Carolina Bar,
Association of the United States Navy, Lawyers USA, Military.Com, Forbes.Com,
and CNN Business. Marc also serves as an officer in the United States Naval
Reserve.
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