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Friday, December 31, 2010

Interest When No Mortgage On Qualified Principle Residence

The broad deductibility of qualified principle residence interest is actually an exception to the general rule.  When debt is not secured by residence, then tracing rules (ie, how was the borrowed money used) are invoked.  Under tracing the rules vary depending on whether the loan proceeds are used for business, personal, investment, or passive activities.  If the proceeds of the loan are used for more than one type of thing, an allocation to determine the interest for each use of loan proceeds is required.  Use the following categories:

Trade or business
Passive activity
Investment
Portfolio
Personal

Interest that cannot be allocated to some combination of the first four AND is not residential interest, is personal interest.  Personal interest is not deductible.

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