Land for second home tax question

Hi,

I have couple of questions:

  1. If I purchase land for investment, is the interest on loan used to make the purchase, or property tax paid on it deductible for income tax purposes?

  1. If I purchase land for building a second home, and the process for building the home will take abt 24 months, when can I start deducting the interest and property tax (if not right from purchase time).

Thanks in advance for any information.

Reply to
ak_bat
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OK. So I did some research on this forum (should have done it before posting...but oh well. Live and learn). So from what I understand, for #1, it is only deductible as investment expense, not as mortgage interest. For #2, I can deduct as mortgage interest as long as there is a livable dwelling in 24 months. Am I correct? In either case how is property tax treated for deduction purposes?

Another thing that I read on this forum was that if I was to take a second mortgage on my existing home (for abt $400K) and buy the land (or for that matter to buy land and build a house on it), then I can deduct the interest on it as mortgage interest. Is that accurate? Or does the second mortgage have to be used to improve my first home itself?

Reply to
ak_bat

The deductibility of interest on an equity loan is limited unless you use the tracing rules. The limitation says that you can deduct the interest on no more than $100K equity loan on your schedule A. And that interest needs to be added back for the AMT calculations.

If you want to deduct interest on MORE than $100K in equity debt you need to follow the tracing rules. This will allow you to deduct the interest on the schedule where it belongs. For example, if you took out a $400K equity loan on your home and you used the money in the following ways, you'd report the interest as follows:

$100K to fix up your home - this is now converted to acquisition debt and is fully deductible with no add back for AMT. $150K to buy a rental property - This goes on Schedule E; $100K to buy land as an investment - This is investment interest and is subject to investment income $50K to put the kid through college - THIS is the ONLY real equity debt you and is deductible on Schedule A BUT gets added back for the AMT calculations.

Good luck, Gene E. Utterback, EA, RFC, ABA

Reply to
eagent

Thanks for that and it makes sense. What about deductions for Equity loan for less than 100K? Is that fully deductible?

========================================= MODERATOR'S COMMENT: Please try to trim some of the quoted material no longer needed for your reply. Thank you.

Reply to
ak_bat

SNIPPED to avoid the wrath of the moderator!

text -

For equity loans of less than $100K the interest is deductible on Schedule A BUT gets added back on Form 6251 for the AMT IF the money was NOT used to improve the property.

Gene E. Utterback, EA, RFC, ABA

Reply to
eagent

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