The court rejected this argument, stating the statute's language limits the amount of indebtedness
on the home or homes, not the amount of a taxpayer's indebtedness
Qualified residence interest is interest on acquisition indebtedness
or home equity indebtedness
with respect to a taxpayer's qualified residence (in this case, there was no question that the residences involved were qualified residences).
Therefore, for example, if a taxpayer incurs a debt secured by his qualified residence and uses a portion of the debt proceeds to refinance an existing acquisition indebtedness
and uses the remaining portion of the debt proceeds for purposes other than the substantial improvement of the residence, the portion of the debt used to refinance the acquisition indebtedness
will qualify as acquisition indebtedness
and the portion of the debt used for other purposes will generally qualify as home equity indebtedness
, subject to the $100,000 limitation on home equity indebtedness
As a result, the note should not be considered to be genuine indebtedness
The Revenue Reconciliation Act of 1993 made a number of changes relating to the exceptions to the general rule requiring that discharge of indebtedness
be included in gross income.
It is retroactive to January 1, 1993, so that it applies to all discharges of indebtedness
on or after that date.
The adjustments to basis are made to property held by the debtor at the beginning of the year after the discharge of indebtedness
The notice only applies to acquisition indebtedness
, not substantial improvements or refinance indebtedness
other than acquisition indebtedness
secured by the taxpayer's principal or secondary residence, to the extent the aggregate amount of the debt does not exceed the excess of the fair market value of the residence over the amount of acquisition indebtedness
While personal interest is nondeductible, qualified residence interest, which includes interest on acquisition indebtedness
and home-equity indebtedness
, is generally deductible.