Deducting construction loan interest

[lz06]

In 2020 I paid 1) mortgage interest on the home I currently live, and 2) mortgage interest on a construction loan for a home that we are building and will move into in 2021. I did not receive a 1098 for the construction loan. Can I deduct both mortgage interest payments on my tax return? 

[LinaJ2020]

Yes, you can. 

You can deduct the interest on your construction loan if the loan was secured by the property you moved into. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.  I would still suggest you to contact your bank to verify whether you will receive the Form 1098.  As IRS also receives a copy of the form, it is important to report it correctly on your taxes so to match IRS' record.  If they will not send you one for whatever reasons, and if you did pay your mortgage interest during 2020, you will still be able to claim it on your tax return.  Here are steps:

In TurboTax online,

• Sign in to your account, select Pick up where you left off
• At the right upper corner, in the search box, type in "1098" and Enter
• Select Jump to 1098
• Follow prompts

Note that your mortgage interest might not change your total tax refund.  It will only change if your total itemized deductions including the mortgage interest exceeds your standard deduction.  In the TurboTax program, when you enter itemized deductions such as mortgage interest, property taxes, medical expenses, charitable contributions, all of these items are added together. Unless the total of itemized deductions exceeds the standard deduction for your filing status, you would not see any change in tax due or refund.  

[lz06]

Thanks but I haven’t moved into the home yet. I will this year when it’s completed. Does that change anything? 

[JohnB5677]

The simple answer is yes you can.  LinaJ2020 gave you an excellent overview of the mortgage issue with a home you intend to occupy.  As stated above, you have 24 months to move in.

[lz06]

Thank you!

Question on the outstanding principle balance (per turbotax, "If you took out the loan in 2020, please input your original loan balance"). I'm wondering if my original principle balance is the entire construction loan amount (because even though on the loan acquisition date i will have drawn zero, I'm technically still obligated to eventually draw the entire thing)? Or is it just the amount you have drawn as of the acquisition date? 

[ToddL99]

Your original principal balance would be the amount you have drawn as of the acquisition date - if that was "0", and the program won't accept it, then round up to "$1".

With a construction loan, the lender has committed to lending you a certain sum, but you don't owe that amount until you have drawn it completely down in the process of building your home. You will only pay interest on the amounts you have drawn, not what they have committed to lend you over the course of construction.

And, you are not obligated to eventually draw the entire amount. If you decide to stop construction (illness, divorce, found a better property), you can stop - you'll be out the costs of getting the loan (points, application fees, appraisal, etc.) but you'll only owe the bank whatever they have actually lent you for the project.

[john-demumbrum]

Follow up question to Lina for clarification:

Can i deduct the interest on my construction loan if the loan was secured by other equity assests (e.g., a Line of Credit) rather than the property itself? 

[DavidD66]

Yes, you can deduct the interest on a construction loan that was not secured by the property you built on.   You can also deduct property taxes paid during construction. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.  The 24-month period can start any time on or after the day construction begins.  You probably will not receive a Form 1098 from your lender, because it is a "construction loan" and not a mortgage loan.

[john-demumbrum]

David - 

Thank you for your quick response.  While my own logic is wanting to agree with your answer, I'm getting caught up on the BOLD/Underlined sentences in the 936 publication below. My two Lines of Credit were secured and unsecured, respectfully, based on my non-retirement investment assets and income - not the home, itself, being built. How do you square your answer with this guidance? I truly appreicate your help.

Publication 936 - Main Contents
Part I. Home Mortgage Interest
This part explains what you can deduct as home mortgage interest. It includes discussions on points and how to report deductible interest on your tax return.

Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, or a second mortgage.

You can’t deduct home mortgage interest unless the following conditions are met.

You file Form 1040 or 1040-SR and itemize deductions on Schedule A (Form 1040).
The mortgage is a secured debt on a qualified home in which you have an ownership interest. Secured Debt and Qualified Home are explained later.

Both you and the lender must intend that the loan be repaid.
Note. Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.

[DavidD66]

I square my answer the guidance in Publication 936 by the fact that Pub 936 also says:

"Home under construction.

You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy."

It's an exception.  You cannot have a mortgage secured by a home that has not been built.  But the IRS lets you treat the construction loan as if it were a qualified mortgage.  Similarly, you can't deduct interest on a home that hasn't been built - it's not a qualified home.  But the IRS let's you do so, if it's under construction and becomes your primary residence.  You can deduct the interest on your construction loan, subject to the limits on home mortgage deduction.  

[john-demumbrum]

Thanks so much for the further explanation, David -- so appreciated! Have a great 2024!