I am building a new residence with a contractor. What deductions are available to me. There will also be a mortgage for the majority of the cost.
You never get a tax deduction for building something. The money you spend to buy or build an asset is included in the "cost basis." If and when you sell, you pay tax on your capital gains, which is the difference between the selling price and your cost basis (which can also be considered what you originally invested). When building a new home, anything you pay for is included in your cost basis, including building materials and labor. You do not get a basis adjustment for labor you provide yourself or other volunteer labor, only costs you actually paid for. You can also include the cost of the land, and the costs for building permits, inspections, utility hookups, and some required fees. There is a list of qualifying items beginning on page 8 of publication 523.
You need to keep track of your basis (receipts, other proof of costs) for as long as you own the home plus 3 years after you sell, so you can properly determine your capital gains when you sell.
You can, of course, deduct property taxes you actually pay. You don't deduct money paid into escrow, if your mortgage has an escrow account, you only deduct the property taxes when the taxing authority (city, county, etc.) is actually paid.
You can deduct mortgage interest on your main home and on one second home (like a vacation home). If this home will count, then you can also deduct the interest on a construction loan, as long as you meet three conditions; the construction loan is secured by the land, you convert the construction loan to a mortgage when construction is finished, and you finish construction in 2 years or less. If you fund the construction with cash or other loans not secured by the property, you can't deduct the interest.
Assuming you're building a new personal residence, generally the only deductions you'll have will be mortgage interest and property taxes. Other associated costs will go into the cost basis of your home.
interest on construction loans is qualified residence interest if the following requirements are met (but are subject to the qualified residence interest rules)
1) a home under construction is treated as a qualifying home for up to 24 months provided that when ready for occupancy, the house is used as a main or second home.
2) if the construction period exceeds 24 months, the interest for the additional months is considered personal interest
3) loan proceeds must be directly traceable to home construction expenses, including the purchase of the lot
4) before construction begins, the loan does not qualify as acquisition debt and interest incurred during that period is generally treated as personal interest
5) 90-day rule. a loan incurred within 90 days after construction is complete may also qualify to the extent of construction expenses made within the period starting 24 months before completion of the house and ending on the date of the loan
5) rephrased - Debt incurred after the residence or improvement is complete, but no later than the date 90 days after such date, may be treated as being incurred to construct or improve the residence to the extent of any expenditures to construct or improve the residence which are made within the period beginning 24 months prior to the date the residence or improvement is complete and ending on the date the debt is incurred.
All of the preceding answers assume that you are building the home for your own use, and you are going to live in it as your primary home when construction is completed. If that's not the case, post details. Some of the answers might change.
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