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<< What if the loan IS only secured by the lot adjacent to, and used by, but not platted the same as the residence? Do you think my logic would prevail (deductible), or must it be secured by the building lot and house as implied by Sched A instructions? That is actually the second option in his question. Well, actually the third. The second one is an unsecured loan to buy the lot, which isn't deductible. >>

I don't see how it could be deductible as personal residence interest if the mortgage is secured only by the vacant lot, regardless of the use of that lot. IRC 163(h)(3)(B) and (C) require that the indebtedness be secured by the residence, and I didn't see anything in the regs that would include adjacent lots whose mortgages are not secured by the lot with the home. There might be a ruling somewhere that I'm not aware of, but absent that it looks to me like it wouldn't qualify.

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Phil Marti
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