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For the pros and those having trouble sleeping or filling their lives, there's a fascinating discussion going on at misc.taxes.moderated. It got started when someone floated a plan he had for (legally) paying his real estate taxes, plus 8% interest, only every 4 or 5 years. I'll leave out all the details of why he thought the plan would make him money.

Of course, with the exception of one person, we all said the interest wouldn't be deductible. This led to "why?" which led to an examination of the Code. Lo and behold, IRC 163(h) defines home equity indebtedness as any indebtedness secured by the residence, within the $$ limits. I haven't looked at the Regs or caselaw, so I don't know whether IRS has taken a formal position or it has been litigated. Just based on the "clear language" (irony alert) of the Code, it looks to me you could make a strong case for deducting this interest or, for that matter, interest on any debt that had legally encumbered the residence.

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