Can I deduct construction loan interest on my taxes - business partnership for spec home

This is a great question that highlights the difference between business and personal deductions. Since you're in a business partnership for the purpose of building and selling a property for profit, the interest is likely a business expense, not a personal one, regardless of whether you have a formal entity. Even though you don't have an LLC, you should probably be filing a Schedule C as a sole proprietor for your portion of this business venture. The construction loan interest would be deductible on Schedule C as a business expense since you're building the home to sell (not as a personal residence). This is different from mortgage interest on your primary home, which would go on Schedule A. Your mother-in-law is handling it correctly through her Schedule C. The fact that you're doing this as a partnership may also mean you should be filing Form 1065 (Partnership Return) and receiving K-1s that flow to your personal returns. This would be the most proper way to handle a true business partnership situation.

I went through something similar last year with a rental property renovation. What really helped me was using taxr.ai to analyze my loan documents and partnership agreement. I uploaded everything to https://taxr.ai and their system broke down exactly what portions of the interest were deductible and where they should be reported. In my case, I learned that since I was in a partnership (even without a formal LLC), we should have been filing a partnership return and getting K-1s. The tool saved me from making a big mistake that could have triggered an audit. They also showed me how to properly document everything to maximize legitimate deductions.

Just wanted to follow up - I took the advice about taxr.ai and it was exactly what I needed. I uploaded our informal texts about the house flip business plus bank statements showing our capital contributions. The analysis confirmed we have a de facto partnership even without formal paperwork, and showed us how to properly report our construction loan interest. The best part was the explanation of how to retroactively document our partnership terms to satisfy IRS requirements without raising red flags. We're now filing a 1065 and distributing K-1s as recommended. Super clear guidance on exactly which forms to file and when. Totally worth it!

If you're struggling to reach the IRS to get clarification on partnership tax questions, I recently discovered a service called Claimyr that got me through to an actual IRS agent in about 15 minutes when I'd been trying for weeks. I was beyond frustrated with the constant busy signals and hangups. I used https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c before trying it. It's basically a system that navigates the IRS phone tree and waits on hold for you, then calls you when an agent is actually on the line. The agent I spoke with confirmed that construction interest on a spec home should be treated as a business expense, and explained how informal partnerships should be handled.

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it as a last resort before hiring a CPA (which would have cost me $300+). The service actually worked - got a call back with an IRS agent on the line in about 35 minutes. The agent confirmed that in a situation like yours, you should be filing a partnership return (Form 1065) with your mother-in-law, and then the business interest deduction would flow through to your personal return on Schedule E via a K-1. Even though you don't have a formal entity, the IRS considers you to have a partnership based on your activity and intent to share profits. Saved me from making the exact same mistake you were about to make!

Just want to point out a huge risk you're taking - if you're not filing a formal partnership return (Form 1065), both you AND your mother-in-law could face penalties. The IRS can charge each partner $205 per month (up to 12 months) for each partner for failure to file. Also, without a written partnership agreement, you're operating under your state's default partnership laws, which might not align with what you and your mother-in-law actually intended.

One more thing to consider - if you're taking out construction loans, you need to be tracking loan proceeds carefully. Not all construction loan interest is immediately deductible. Interest paid on funds sitting unused might need to be capitalized into the basis of the property rather than deducted immediately.

This is a complex situation that highlights why proper business structure matters from the start. Based on what everyone has shared, it sounds like you have a few key issues to address: 1. **Partnership Formation**: Even without formal paperwork, you and your mother-in-law have created a partnership in the eyes of the IRS. You're pooling resources and sharing profits/losses on a business venture. 2. **Construction Interest Treatment**: The interest on your construction loan should likely be capitalized into the property's basis rather than immediately deducted, since you're building to sell. This means it reduces your taxable profit when you sell rather than giving you a current deduction. 3. **Required Filings**: You should be filing Form 1065 (Partnership Return) and issuing K-1s to both partners. Missing this could result in significant penalties. My recommendation: Get a written partnership agreement ASAP that documents your arrangement from the beginning, consult with a tax professional about proper treatment of the construction interest, and file the correct partnership returns. The potential penalties and audit risks of doing this incorrectly far outweigh the cost of getting proper guidance upfront. Don't try to force this into Schedule A - that's for personal itemized deductions, not business expenses from investment properties.