John L. Seymour - Page 15

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          indebtedness may not exceed $1 million or $500,000 for married              
          taxpayers filing separately.  Sec. 163(h)(3)(B)(ii).                        
               In addition to stating that section 1041 will be disregarded           
          in determining the eligibility of acquisition indebtedness,                 
          Notice 88-74, 1988-2 C.B. 385, also provides guidance concerning            
          what is meant by acquisition indebtedness.  Notice 88-74, 1988-2            
          C.B. at 385-386, states:                                                    

                    Regulations will provide for purposes of section                  
               163 that a debt may be treated as incurred in                          
               acquiring, constructing, or substantially improving a                  
               residence of the taxpayer to the extent that the                       
               proceeds of the debt are used, within the meaning of                   
               section 1.163-8T, to acquire, construct or                             
               substantially improve the residence.                                   
          *    *    *    *    *    *    *                                             
                    Notwithstanding the tracing rules of section                      
               1.163-8T, in the case of the acquisition of a                          
               residence, debt may be treated as incurred to acquire                  
               the residence to the extent of expenditures to acquire                 
               the residence made within 90 days before or after the                  
               date that the debt is incurred.                                        
          *    *    *    *    *    *    *                                             
                    The total amount of debt which may be treated as                  
               debt incurred in acquiring, constructing or                            
               substantially improving a residence may not exceed the                 
               cost of the residence (including the cost of any                       
               improvements).                                                         

          Therefore, debt secured by the residence will be treated as                 
          acquisition indebtedness either under the normal tracing rules of           
          section 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999            
          (July 2, 1987), or, as an alternative, any debt may be treated as           
          incurred to acquire the residence to the extent of expenditures             



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