Qualified residence interest.

• Author: Corrick, Stephen R.

In general, individuals can deduct qualified residence interest (QRI) without limitation. QRI includes interest on acquisition indebtedness and home equity indebtedness (HEI). HEI is up to $100,000 of debt secured by a qualified residence to the extent the amount of such debt does not exceed the qualified residence's fair market value (FMV), reduced by the amount of acquisition debt on the home (Sec. 163(h)(3)(C)). In practice, however, lenders often restrict total borrowing secured by a home to not more than 70%--80% of the home's FMV. In these situations, homeowners might tend to rule out the possibility of a tax-favored "home equity loan," believing they cannot borrow any more money than can be secured by their home.

In Letter Ruling 9038023, the IRS confirmed that interest expense is QRI even though the debt, in addition to being secured by a qualified residence, is secured by other assets (a bank account in the ruling). The Service concluded that the relevant requirement was that the debt was secured by a qualified...