Election not to treat debt as secured by a qualified residence.

The mortgage interest deduction has been part of U.S. tax policy since the 1913 Code. However, many taxpayers cannot deduct all mortgage interest paid. Proper planning can maximize the mortgage interest deduction and can be a useful strategy in overall tax planning.

Overview

Interest is the amount contracted for to pay for the use, forbearance detention of money. Sec. 163(a) provides a general rule that all interest paid or accrued in the tax year on debt deductible, but there are numerous exceptions. Usually, under Sec. 163(h) for a taxpayer other than a corporation, no deduction is allowed for personal interest paid or accrued during the tax year.

Sec. 163(d) limits a noncorporate taxpayer,s deduction for investment interest to net investment income for the tax year. 163 (d)(2) permits an unlimited carryforward of any amounts so disallowed. Interest disallowed may be deducted in the succeeding tax year the extent the taxpayer has investment income in that year.

Interest attributable to a trade or business or to property held for the production of income may be deducted by itemizers and nonitemizers alike, but is subject to the various ancillary restrictions, such as those governing passive activity losses (Sec. 469) and at-risk amounts (Sec. 465). Trade or business interest may also be subject to capitalization under Sec. 263A(f). Interest on certain student loans is partial deductible under Sec. 221.

Under Sec. 163(h)(2)(d), "qualified residence interest" (QRI) includes interest paid or accrued during the tax year on (1) acquisition debt on a taxpayer's qualified residence or (2) home-equity debt on a taxpayer's qualified residence.

QRI

There are two types of QRI, according to Sec. 163(h)(3)(A), on (1) "acquisition" debt and (2) "home equity" debt.

Acquisition debt: Sec. 163(h)(3)(B) defines acquisition debt as any debt incurred in acquiring, constructing or substantially improving a qualified residence and secured by it. This term also includes debt secured by a qualified residence and incurred to refinance acquisition debt; however, such debt is limited to the amount of debt refinanced at the time of the loan.

An overall dollar limit under Sec. 163(h)(3)(B)(ii) caps the "aggregate amount" of acquisition debt at $1 million for any period ($500,000 for a married taxpayer filing separately); this limit is not indexed for inflation. "Aggregate amount" probably means the total debt secured by one or more qualified residences, not just that...