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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121354  
Subject: Re: Timing of property tax payment on an empty l Date: 12/15/1998 9:57 AM
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[[We purchased a lot in September of this year.]]

Congratulations....

[[ We are
intending to start building a house on the lot sometime
in 1999.]]

Again...congrats!!!

[[ We are currently living in an apartment.
My question is, are the interest and taxes on the lot
deductible this year as home mortgage deductions?]]

Much of that will depend upon a number of factors in the future. The property taxes are certainly deductible (as are all property taxes...regardless of the use of the property). But the interest expense issue is a bit different.

[[ If we wait until January to pay the taxes, will they
be deductible in 1999 even though we start construction
after January?]]

Since you are a cash basis taxpayer, if you pay the property taxes in 1999, they will be a 1999 deduction. If you pay them in 1998, they will be a 1998 deduction. So you have the option of "timing" your deduction. Which year would be better for you? You'll have to make that call on your own.

[[ We had a house until October this
year, so we will be itemizing this year. I'm not
sure whether we'll be able to itemize next year,
depending on the schedule of building. What is my
best approach for payment of property tax?]]

Well, if you believe that you'll not be able to itemize next year, but sure than you will this year, then it looks like this year would be a better choice.

But remember that property taxes are not deductions for AMT purposes...so if you are over the AMT level, payment this year may not help.

But the interest expense rules are a bit more complicated. I'm guessing that you're paying interest on the lot, and may also be paying interest on the construction loan. If that is the case, you should know more about this issue.

A residence under construction may be treated as a qualified residence for a period of up to 24 months, but only if it becomes a qualified residence (without regard to this "under construction rule") as of the time it is ready for occupancy.

The 24-month period referred to above may commence on or after the date construction is begun.

Example: John owns a residential lot. On Apr. 20 of year 1, John obtains a mortgage loan secured by the lot and any property to be constructed on the lot. He uses the proceeds of the loan to finance the construction of a personal home on the lot. Construction commences on Aug. 9 of year 1. The personal home is ready for occupancy on Nov. 9 of year 3, and qualifies as John's residence at that time (without regard to the "under construction" rules). Under these circumstances, John may treat the home as a residence for any 24-month period during which it was under construction. This 24-month period may commence on or after the date construction began (Aug. 9 of year 1). If John chooses to begin this 24-month period on Aug. 9 of year 1, the period ends on Aug. 8 of year 3. Whether the home is a qualified residence for the period Aug. 9 -- Nov. 8 of year 3 is determined without regard to the "under construction" rules.

You can read more about the home mortgage rules and construction interest in IRS Publications 530 and 936 at the IRS web site.

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Roy

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