Income Tax Questions Answered Because of Radio - The World Is a Client of "Better Business"

Having hosted a financial radio program over severalmortgage interest expense subject to the following.
years has exposed me to many questions. Some ofThe construction loan must not precede the moving in
these questions seem rather basic to me while othersand claiming of the new principal residence by more
involve situations I havn't thought of on my own. I lovethan two years. Meeting this requirement will give us
to get questions, I really do. Questions are what makethe desired itemized deduction, on schedule A, of
life worth living when one is a talk show host,mortgage interest expense (IRS Publication 936).
especially when the goal is to have interaction with theThe fun does not stop here. The next question, sent
listeners.by email, involves making a charitable contribution with
Just recently, I was asked a question on the airappreciated stock. One of our devoted listeners
regarding construction loan interest. This listener hadwanted to know how to handle the contribution of
built a principal residence and like so many, used astock with a fair market value of $20,000 and a cost
construction loan to help with the financing. His questionbasis of $2,000. If he took the fair market value (FMV)
to me, "Is interest paid to construct a principalof $20,000 would he have to pay capital gain on the
residence deductible as qualified mortgage interestdifference between FMV and cost? The answer is no.
expense?This caused me to do some research asHe can use the FMV to take the charitable deduction
the typical rule for construction period interest is that itbut will be subject to a 30% adjusted gross income
be capitalized as part of the cost of the project. The(AGI) limitation. This is to say that if his AGI is $50,000,
normal sequence would be to include interest on a loanthe most he will be able to take regarding this
to acquire land as investment interest subject to thosetransaction is $15,000. The remaining $5,000 can be
rules. Investment interest is deductible to the extentcarried forward for a period not to exceed 5 years.
their is investment income (i.e. interest, dividends, andThis listener could elect to take his cost basis as the
capital gains treated as investment income). Thecharitable deduction thus subjecting him to a 50% AGI
construction period interest, has we have justlimitation. This would mean that he could take up to
mentioned, would be added to basis of the building$25,000 in contributions for the current year but he
being constructed along with interest on the land (thewould only get to take the $2,000 cost basis as the
project has gone from investment stage toactual deduction. In this case, the FMV method is the
construction stage).best. Taking this deduction will require that form 8283
When the project is complete, then there is normally abe filed with his 104. The good news is that he will not
new loan that retires the land and construction loansbe required to get an appraiser's signature (required for
as a mortgage against the property itself. Thisnon-cash gifts of $5,000 or more to one charity) as
mortgage interest is then deductible based on thethe stock is publicly traded.
activity of the property. If it is business property, theWhat other questions will arise during 2007 and
mortgage is deducted as trade or business expense. Ifbeyond? I do not know, I just answer the phone or
the property is a rental unit, the interest will belook at the emails. As always, if you have a question, it
deductible in accordance with rental property rules. Byis likely that someone else has it as well. Maybe your
special rule, the construction period interest for thequestion will make the "Better Business" interaction
building of a principal residence is deductible as qualifiedpage.