02 Nov Does the Mortgage for a Home That is Being Constructed Qualify for the Housing Allowance?
Question:
Can I Deduct the Mortgage for a Home That is Being Constructed? Does it qualify for the housing allowance?
Answer:
The IRS allows for taxpayers to deduct all of the interest they pay on a construction loan within the 24 months before the home is completed. (See Publication 936 https://www.irs.gov/publications/p936)
There are some rules in order to qualify for the mortgage interest deduction:
- You can treat a home under construction as a qualified home for up to 2 years (24 months total), but only if it becomes your home when it is ready for occupancy.
- This 24 month period can start any day on or after construction begins.
- If the construction lasts longer than 24 months, interest paid after 24 months is considered personal interest and does not qualify for a deduction.
Clergy should keep in mind this is only for deducting home mortgage interest on your itemized deductions on Schedule A. This 24 month exception does not apply to the Clergy Housing Allowance.
The IRS is very clear that Clergy can only use one principal residence for their housing allowance at any given time. If you are already using expenses from the principal residence you live in, this prevents you from using the expenses of the home being constructed. Once you move into the constructed home and make it your principal residence, then you can start using those expenses for the housing allowance. For this reason, it may be beneficial to pay construction expenses or construction loans after moving into the home so you can use them for the housing allowance.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.