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B. Applicability of Section 163(h)(2)(D)
In particular, respondent argues that petitioners’ interest
payments fail to satisfy the requirements for the exception
provided in section 163(h)(2)(D) for “qualified residence
interest”. That is because, although petitioners’ principal
residence meets the definition of a “qualified residence” (see
sec. 163(h)(4)(A)(i)(I)), and although the loans constituted
“acquisition indebtedness” (which, pursuant to section
163(h)(3)(B)(i)(I), includes indebtedness “incurred in * * *
constructing, or substantially improving any qualified
residence”), repayment of the loans was not secured by such
residence as required by section 163(h)(3)(B)(i)(II).
We agree with respondent that, based upon the stipulated
facts, the $64,000 interest payment does not constitute
“qualified residence interest” within the meaning of section
163(h)(2)(D) and (3).
5(...continued)
(A) interest paid or accrued on indebtedness
properly allocable to a trade or business (other
than the trade or business of performing services
as an employee),
(B) any investment interest (within the
meaning of subsection (d)),
* * * * * * *
(D) any qualified residence interest (within
the meaning of paragraph (3)),
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