When Home Construction Interest Is Not Deductible

When home construction interest is not deductible.

The rule that prohibits a deduction of personal interest generally does not apply to “qualified residence interest”.  But don’t assume that interest on a residential construction loan is automatically deductible.

For example, if you use your savings account as security for a construction loan, the IRS considers the interest you pay on the loan to be personal interest which is not deductible.

For residential construction loan interest to be fully deductible, the loan must be secured by a taxpayer’s principal or secondary residence. If the loan does not exceed the adjusted basis for the property, the interest is then fully deductible as qualified residence interest