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Tax File Memorandum

In: Business and Management

Submitted By zw21
Words 663
Pages 3
Facts
Mr. Smith lives in his principle residence in Indianapolis. The present balance on his home mortgage that was incurred after October 13, 1987 in acquisition and secured by such residence is $300,000. Mr. Smith has no other mortgages and no other residence. He is planning to take out a loan of $240,000 to purchase a condo, close to Northwestern, for his daughters to live and planning to sell the condo when the girls graduate from Northwestern University. The loan of 240,000 will be secured by the condo. Mr. Smith’s filling status remains head of household. He itemizes his deductions. And Mr. Smith has neither net investment income nor disallowed investment interest expense from previous year in the year when he purchases the condo. He will not pay points and mortgage insurance premium on this loan.

Issues
Can Mr. Smith deduct interest expense on his loan for a condominium?

Conclusion
Mr. Smith can fully deduct his interest expense as qualified residence interest.

Analysis
Code §280A(d)(2)(A) holds that the unit used for personal purpose by members of the family of the taxpayer is deemed to be used by the taxpayer for personal purpose. Code §280A(d)(1) states that a dwelling unit is used as the taxpayer’s residence if he uses it for personal purposes more than the greater of 14 days or 10 percent of the number of days during such year for which such unit is rented at a fair rental. Code §163(h)(4)(A)(ii) provides that besides the principal residence, one other residence of the taxpayer which is selected by the taxpayer for the taxable year and which is used by the taxpayer as a residence is qualified residence. Since Mr. Smith borrows the money to acquire his secondary residence for his daughters to live during the entire school year and the loan is secured by the residence, his loan is acquisition indebtedness under Code §163(h)(3)(B) and his...

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