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The Tax Court held that a couple could deduct interest paid on a loan incurred to purchase property on which they intended to construct a new home but never did. According to the court, a qualified residence was deemed to be under construction when an existing home was demolished and when other preparatory work, such as planning and acquiring permits for the new home, occurred. Furthermore, the court stated, the relevant Treasury regulation does not require that the residence under construction ever be occupied.

Taxpayers may deduct mortgage interest related to acquiring, constructing or substantially improving a qualified residence, defined as their principal residence and one other qualified dwelling. A residence under construction can be treated as a qualified residence for up to 24 months if, at the time the residence is ready to be occupied, it is a qualified residence (Temp. Regs. Sec. 1.163-10T(p)(5)(i)).

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