Taxpayer Denied Investment Interest Deduction for Excess Home Mortgage Debt

Taxpayer Denied Investment Interest Deduction for Excess Home Mortgage Debt

Recently in Tax Court, in the case of Norman v. Commissioner (December 27, 2012), the taxpayer made a clever but ultimately unsuccessful argument to secure an interest rate deduction for debt related to the purchase of his home that was in excess of the maximum $1.1 million of debt on which interest can be deducted. The taxpayer bought the house on about 10 acres of land for $1.8 million. He borrowed the money from a lender. He claimed that the interest on the debt of the 1 million was deductible since it applied to the purchase of his primary residence. According to the taxpayer, the remaining $800,000 from the loan was attributable to the purchase of excess land, which he intended to develop. The taxpayer claimed that interest on the portion of the debt attributable to the excess land should be deductible as an investment interest expense, since his intention was to use the land for development.

The court disallowed the taxpayer’s investment interest deduction on the grounds that the purchase agreement for the residence did not contain any allocation of the purchase price between the residence and the excess land that could be developed and sold. Moreover, the taxpayer did not obtain any appraisal to support this allocation.

While he lost his case, it was not precedent-setting in that the court made no declaration of its opinion that it would block a future taxpayer from establishing, if indeed they follow protocol and obtain an allocation in the purchase contract or an appraisal, that a portion of the purchase price was paid for land to be held for investment purposes.


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