|January 31, 2013|
Previously published on January 2013
In the recent Tax Court case of Norman v. Commissioner (December 27, 2012), the taxpayer made a clever but unsuccessful argument in his attempt to secure an interest deduction for debt related to the purchase of his residence that was in excess of the maximum $1.1 million of debt on which interest can be deducted. The taxpayer purchased a home on 9.875 acres of land for $1.8 million, which he borrowed. He claimed that debt of $1 million applied to the purchase of the residence, which became his primary residence, so interest on that debt was deductible. According to the taxpayer, the remaining $800,000 of debt was attributable to the purchase of excess land, which he intended to develop. The taxpayer claimed that interest on the portion of the debt attributable to the excess land should be deductible as investment interest expense, since he intended to develop the excess land.
The court disallowed the taxpayer’s investment interest deduction, pointing out that the purchase agreement for the residence did not contain any allocation of the purchase price between the residence and its appurtenant land, and the excess land that could potentially be developed and sold. Furthermore, the taxpayer did not obtain any appraisal to support his allocation.
While this taxpayer lost his case, the court said nothing in its opinion that would preclude a future taxpayer from establishing, based on allocation in the purchase contract or an appraisal, that a portion of the purchase price was paid for land to be held for investment purposes.