I agree. No matter that the builder wrote it as two documents, you are paying one price for the home, not interest and a lower price for the home.
I will concede there is room for a clever attorney -- there almost always is. But I still don't think it's enough. Mortgage interest is deductible if you are the "legal or beneficial owner" of the home, and you are the person who actually pays the interest. (Technically, you don't have to be the borrower on the note.) There are still 3 objections to this theory.
1. You would have to pay the interest directly to the bank, not to the builder.
2. A beneficial owner is someone who has the responsibilities and benefits of ownership without being on the title. I previously reviewed 2 Tax Court cases on the topic. In one case, brother A bought a house for his brother B to live in, because B was a recent immigrant with no credit history. B lived in the home with his family, paid all the bills, performed all maintenance and chores common of homeowners, and planned to put the home in his own name when he had credit and could get a loan. B was allowed to deduct the mortgage interest even though A's name was on the title. In the other case, C was an elderly man who invited his adult son D to move in with him. D paid all the bills, performed all maintenance and chores common of homeowners, and planned to inherit the home when his father died. The court allowed D to deduct the mortgage interest even though the loan was in C's name.
Here, however, the builder owns title, and is still building the home. You don't live there, and you have none of the burdens or benefits of home ownership. I don't think you are a beneficial owner.
3. A construction loan is not a deductible mortgage unless it is converted to a mortgage when the home is completed. Here that can't happen, since the borrowers would be different people. You can't convert the construction loan in the builder's name to a mortgage in your name, you have to get a new loan (assuming you even get a loan). So it's not a mortgage, even if you somehow meet the beneficial owner rule and pay the bank directly.
