Question

1. Boyce and Bonnie have owned their home, now worth $300,000, for 15 years, and they are proud of the fact that they just recently paid off the original 15-year mortgage. Bonnie was a stay-at-home mom, but Boyce lost his job two years ago and is still looking for a new job. Bonnie found a part-time job to supplement Boyce’s unemployment insurance payments, but Bonnie’s job does not provide health insurance coverage for the family. While he and Bonnie were able to stay on the health insurance policy of Boyce’s old employer for the first year and a half after his layoff, they were uninsured when their 16-year-old daughter Bridget was diagnosed with a devastating kidney disease earlier this year. The doctors gave Boyce and Bonnie little hope that Bridget would survive without a kidney transplant. Fortunately, a donor kidney became available, Bridget underwent the transplant and follow-up care, and she is doing well. The bad news is that the hospital and other bills for her care—even after being very substantially reduced by the hospital after many months of negotiation and providing documentation of their financial situation—totaled $200,000, and Boyce and Bonnie pay these bills by taking out a new mortgage on their home in June, secured by the home. They pay $5,000 in interest on the mortgage for the last 6 months of this year. How much of the this $5,000 can they deduct under § 163(h)(3)?

Answer 1

Deduction of interest under section 163(h)(3) is allowed if,

1) The interest is paid or accrued during the taxable year.
2) It does not qualify as personal interest.
3) It is a "Qualified residence interest" for acquisition indebtedness only".(Special rules for taxable years 2018 through 2025).
4) As per sec 163(h)(3)(F)(i)(l), the "home equity indebtedness interest" is disallowed.
4) Limitation not to exceed $750,000 ($ 350,000 where the married couple files return separately).

From the fact of the case the mortgage loan taken qualifies as "home equity indebtedness", interest of $ 5,000 does not qualify for deduction.