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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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