1-I'm trying to see whether our 2nd mortgage home equity line of credit amount of $135,000 that was:
1- Forgiven by the bank,
2- Secured by our principal residence
3-Utilized solely to make substantial home improvements, ( a complete remodel. )
falls under the IRC 163 (H)(3)(B) exclusion from taxation.
The strict definition of that section from the IRS website says: Aqusition indebteness includes debt incurred in acquiring, building or "substantially" improving a principal residence secured by the residence.
The exclusion from taxation seems to be for 1st mortgages and refinances only but we still seem to fall under the "strict" guidelines of that definition given how all the money was spent on the remodel.
2-Also, does the acquisition of this recourse equity line several years after the home was purchased, still qualify under IRC 163? Nothing in the IRS's definition of acquisition indebteness mentions a timeline as far as "when" the substantial improvements are made?
We have all receipts.
Thank you in advance for your input!!!
1 Answer from Attorneys
While you don't mention it, presumably you are referring to the provisions of section 108(a)(1)(E) of he tax code which allows you to exclude income generated by cancellation of indebtedness. Section 63 addresses whether certain interest payments are deductible. If you read the instructions to Form 982, used to claim the exclusion, the IRS states " Any additional debt you incurred to substantially improve your main home is also treated as qualified principal residence indebtedness." This is after discussing "other" mortgages. Further, IRS Publication 4681 discusses examples of what is excludable, including one where the taxpayer takes out a second mortgage of $50,000 to add a garage to her home. The example allows the second mortgage to be included in the calculation of the amount excludable. These are not court rulings, Revenue Rulings or regulations, but they are examples of the IRS' directions to taxpayers on how to claim the exclusion. Of course, any legal opinion requires a close analysis of the facts and law which is beyond the scope of this website and this response. I hope this is helpful. I suggest you consult with a qualified CPA or attorney if you want a more definitive answer.
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