We have a Tax Court case that actually seems to be beneficial for a taxpayer. Interest paid on a mortgage for a house that was never built is deductible. This couple took out a loan and bought a beachfront home. They tore it down and planned to build a new house on the site. There was a delay in that they could not do so until a state environmental agency granted them a permit. The bureaucratic process dragged on for two years.
By this time, the local (country) real estate market had crashed and the couple couldn’t get a loan to cover the construction costs. They ended up selling the land at a loss. Interest is deductible on the loan for 24 months after construction begins. After the 24-month period ends, the interest paid is nondeductible personal interest.
24 months after the teardown date. IRS regulations on deducting interest on a loan for a home under construction don’t condition deductibility on the house’s completion.
And in this case, the house was never built because of unforeseen circumstances that were well beyond the couple’s control.
Rose, TC Summ. Op. 2011-117