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Thursday, August 25, 2005

Not All Mortgage Interest Is Deductible

Generally, interest on indebtedness secured by a qualified residence is deductible, if it meets the definitions (and is within the dollar limitations of) "acquisition indebtedness" or "home equity indebtedness." What is often overlooked is that even if the interest deduction passes muster under the qualified residence rules, other provisions of the Internal Revenue Code may still deny deductibility.

For example, the following three uses of the borrowed funds will result in disallowance of the interest deduction:
  • Borrowed funds used to purchase or carry a single premium life insurance, endowment, or annuity contract;
  • Borrowed funds used to purchase or carry obligations that produce tax-exempt interest (e.g., municipal bonds); and
  • Borrowed funds used to pay interest on a life insurance policy loan where the policy is owned by the taxpayer.
Temp. Reg. §1.163-10T(b).

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