rr-05-11.pdf

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Part I

Section 56.—Adjustments in Computing Alternative Minimum Taxable Income

(Also §§ 55, 56, 163)

Rev. Rul. 2005-11

ISSUE
Is interest paid on a home mortgage that has been refinanced more than one
time deductible as qualified housing interest for purposes of the alternative minimum
tax?
FACTS
In 1990, A
borrowed $100x to purchase a principal residence (the 1990
mortgage). In 2000, the outstanding principal balance on the 1990 mortgage was $90x,
and A refinanced the $90x balance of the 1990 mortgage (the 2000 mortgage). In
2004, the outstanding principal balance on the 2000 mortgage was $80x
. A refinanced
the $80x
balance of the 2000 mortgage and borrowed an additional $30x. Thus, the
total amount of A
’s mortgage in 2004 was $110x (the 2004 mortgage). A did not use

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the $30x
to acquire, construct, or substantially improve any property that was a principal
residence or a qualified residence. At no time did A’s indebtedness to acquire his
principal residence or a qualified residence exceed $1,000,000. A
is not a married
individual filing a separate return.
LAW AND ANALYSIS
Section 55 of the Internal Revenue Code provides that the alternative minimum
tax is a tax equal to the excess (if any) of the tentative minimum tax for the taxable year
over the regular tax (defined in § 55(c)) for the taxable year.
Tentative minimum tax is defined in § 55(b)(1)(A) for noncorporate taxpayers as
the sum of 26 percent of so much of the taxable excess as does not exceed $175,000,
plus 28 percent of so much of the taxable excess as exceeds $175,000.
The term “taxable excess” is defined in § 55(b)(1)(ii) as so much of the
alternative minimum taxable income for the taxable year as exceeds the exemption
amount provided for in § 55(d).
Alternative minimum taxable income is defined in § 55(b)(2) as the taxable
income of the taxpayer for the taxable year determined with the adjustments provided in
§§56 and 58, and increased by the amount of the items of tax preference described in
§ 57.
Section 56(b) contains the adjustments applicable to individuals, which include
the adjustment for interest in § 56(b)(1)(C). Section 56(b)(1)(C) provides that, in
determining the amount allowable as a deduction for interest, § 163(d), which provides
limitations on investment interest, and § 163(h), which disallows deductions for personal

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interest, shall apply, except that in lieu of the exception under § 163(h)(2)(D) for
qualified residence interest, the term “personal interest” shall not include any qualified
housing interest.
Qualified housing interest is defined in § 56(e)(1) as interest that is qualified
residence interest (as defined in § 163(h)(3)) and is paid or accrued during the taxable
year on indebtedness that is incurred in acquiring, constructing, or substantially
improving any property that is the principal residence (within the meaning of § 121) of
the taxpayer at the time such interest accrues, or is a qualified dwelling that is a
qualified residence (within the meaning of § 163(h)(4)). In addition, the last sentence of
§ 56(e)(1) provides that qualified housing interest includes interest on any indebtedness
resulting from the refinancing of indebtedness meeting the requirements of qualified
housing interest, but only to the extent that the amount of the indebtedness resulting
from such refinancing does not exceed the amount of the refinanced indebtedness
immediately before the refinancing.
The legislative history to the enactment of § 56 as part of the Tax Reform Act of
1986 states “It is clarified that, for minimum tax purposes, upon a refinancing of a loan
that gives rise to qualified housing interest, interest paid on the loan is treated as
qualified housing interest to the extent that (1) it so qualified under the prior loan, and
(2) the amount of the loan was not increased.” H.R. Conf. Rep. No. 841, 99
th
Cong., 2d
Sess., vol. II, at 259 (1986).
Section 163(h) of the Code provides that, in the case of a taxpayer other than a
corporation, no deduction shall be allowed for personal interest paid or accrued during

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the taxable year. Under § 163(h)(2)(D), personal interest does not include qualified
residence interest.
Qualified residence interest is defined in § 163(h)(3) as any interest that is paid
or accrued during the taxable year on acquisition indebtedness or home equity
indebtedness with respect to any qualified residence of the taxpayer. Section
163(h)(3)(B) defines acquisition indebtedness as any indebtedness that is incurred in
acquiring, constructing, or substantially improving any qualified residence of the
taxpayer and is secured by such residence. Section 163(h)(3)(B) also provides that
acquisition indebtedness includes any indebtedness secured by such residence
resulting from the refinancing of indebtedness meeting the requirements of acquisition
indebtedness, or refinancing of acquisition indebtedness, but only to the extent the
amount of the indebtedness resulting from such refinancing does not exceed the
amount of the refinanced indebtedness. Under § 163(h)(3)(B)(ii), the aggregate amount
of acquisition indebtedness for any period cannot exceed $1,000,000 (or $500,000 in
the case of a married individual filing a separate return).
The term “qualified residence” is defined in § 163(h)(4)(A) as the principal
residence (within the meaning of § 121) of the taxpayer and one other residence of the
taxpayer that is selected by the taxpayer for the taxable year and that is used by the
taxpayer as a residence (within the meaning of § 280A(d)(1)).
The 1990 mortgage is indebtedness incurred in acquiring A
’s principal residence.
The interest paid or accrued on the 1990 mortgage meets the requirements of qualified

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residence interest under § 163(h)(3). Thus, the interest paid or accrued by A
on the
1990 mortgage is qualified housing interest for purposes of the alternative minimum tax.
The last sentence of § 56(e)(1), as clarified by the legislative history, indicates
that when § 56(b)(1)(C) was enacted as part of the alternative minimum tax provisions,
Congress intended that interest with respect to a refinancing of a loan that gives rise to
qualified housing interest would be deductible for alternative minimum tax purposes to
the extent the amount of the loan was not increased. When A
refinanced the 1990
mortgage in 2000, the refinanced amount equaled the amount of the outstanding
principal. Thus, the interest paid or accrued on the 2000 mortgage is deductible as
qualified housing interest for purposes of the alternative minimum tax because the
interest on the 1990 mortgage is qualified housing interest and the amount of the loan is
not increased.
Similarly, when A
refinanced the 2000 mortgage in 2004, the interest on the 2004
mortgage is qualified housing interest to the extent of the outstanding principal balance
of the 2000 mortgage at the time of the refinancing because the interest on the 2000
mortgage is qualified housing interest. However, as part of the 2004 refinancing A

borrowed an additional $30x
, and A did not use the $30x to acquire, construct, or
substantially improve any property that was a principal residence or a qualified
residence. Accordingly, for alternative minimum tax purposes A
may deduct only the
interest paid or incurred on $80x and not the interest attributable to the additional $30x
of the $110x
of the 2004 mortgage.
HOLDING

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Interest paid on a home mortgage that has been refinanced more than one time
is deductible as qualified housing interest for purposes of the alternative minimum tax to
the extent the interest on the mortgage that was refinanced is qualified housing interest
and the amount of the mortgage indebtedness is not increased.
DRAFTING INFORMATION
The principal author of this revenue ruling is Martin Scully, Jr. of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this revenue ruling, contact Mr. Scully at (202) 622-4960 (not a toll-free call).