The IRS announced in Revenue Ruling 2010-25 that indebtedness in excess of $1 million incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence may constitute home equity indebtedness.  Prior to this ruling, the qualified personal residence interest deduction was limited to interest paid on $1 million of indebtedness incurred to acquire a personal residence.  A deduction was also allowed for another $100,000 of home equity indebtedness; however home equity indebtedness could not be debt incurred to acquire, construct or substantially improve a personal residence.

Revenue Ruling 2010-25 clarifies that acquisition indebtedness over $1 million can now be treated as home equity indebtedness.  The amount of deductible home equity indebtedness must be secured by a qualified personal residence, cannot exceed the property’s fair market value and is generally deductible regardless of what the homeowner does with the proceeds of the loan.

So if you have been planning those renovations and were concerned by the tax deductibility you can now plan based on the new interpretation.  This ruling by the IRS seems only fair.  It now evens the field with taxpayers who were able to deduct interest on an additional $100,000 of home equity debt on top of the $1 million mortgage.

If you have any questions or would like more information, please contact:

Rachael Leberstien, CPA

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