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.
For more articles on the Clergy Housing Allowance, visit our blog at https://www.clergyfinancial.com/resources/blog/ and select the category “Housing/Parsonage Allowance”
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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