Is the interest paid on a construction loan (to rebuild a primary residence that is demolished) tax deductible in the same fashion as that paid for a home loan on a primary residence? What is the deduction for the fees charged at closing the construction loan? How about the second closing (many construction loans have two closings, one for the initial loan and a second to convert it from a construction to a home loan). What are other tax benefits/detriments of construction loans? What part of the IRC speaks to and governs tax matters surrounding construction loans?

ANSWER

The BIDaWIZ Team's Answer:

The interest is deductible on a construction loan in the same sense as as the traditional home mortgage interest deduction given that a specific condition is met. You must occupy the home within 24 months from the day in which construction commences. The closing costs you can deduct include the home mortgage interest, origination fees or points, prorated property taxes paid at escrow, and a mortgage prepayment penalty. You deduct them in the year you buy your home if you itemize your deductions. Other costs you can add to the cost basis include the fees to purchase the property, abstract fees, charges for installing utility services, legal fees, recording fees, surveys, transfer or stamp taxes, and owner's title insurance. If you decide to sell the property before you occupy, you will likely have to restate prior tax returns and reclassify the interest. There are no other tax benefits or detriment differences from the traditional home mortgage interest deduction. The rules surrounding construction loans are governed by IRC Section 163 and IRS publication 936.