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residence interest under section 163(h)(3). Before turning to
the contentions of the parties, we shall summarize the pertinent
law.
Section 163(a) generally allows a deduction for all interest
paid or accrued during the taxable year on indebtedness. In the
case of a taxpayer other than a corporation, section 163(h)
generally disallows any deduction for “personal interest”. The
term “personal interest” is defined to mean any interest allow-
able as a deduction under chapter 1 of the Code other than, inter
alia, any qualified residence interest. Sec. 163(h)(2)(D). The
term “qualified residence interest” means any interest which is
paid or accrued during the taxable year on, inter alia, acquisi-
tion indebtedness. Sec. 163(h)(3)(A). The term “acquisition
indebtedness” is defined to mean any indebtedness which is
incurred in acquiring, constructing, or substantially improving
any qualified residence of the taxpayer and which is secured by
such residence. Sec. 163(h)(3)(B)(i). The term “acquisition
indebtedness” also includes any indebtedness secured by any
qualified residence of the taxpayer resulting from the refinanc-
ing of acquisition indebtedness, but only to the extent that the
amount of the indebtedness resulting from such refinancing does
not exceed the amount of the refinanced indebtedness. Id.
Section 164 allows a deduction for certain taxes, including
real property taxes, paid or accrued during the taxable year.
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