Personal Residences

• Basically, the IRS defines a primary residence as the home where the taxpayer spends more than 50 percent of his residential time. The IRS allows a taxpayer to deduct certain expenses, like mortgage interest and construction loans, for both a primary and a secondary residence. However, the IRS does not allow any personal deductions for a third or fourth home. If you are building a new home and it is intended as either your primary or secondary residence, you can claim it as a deduction on Schedule A of your taxes.
  
  

Investment Property

• Many people buy or construct houses as an investment. They either build the house with the intention of selling it at a profit (speculation), or they might build it in order to rent it out and generate income from it over a long period of time. In either case, the house is never intended as a personal residence, and profit or loss (and expenses) for the house is reported on Schedule C.
  
  

For-Profit Vs. Hobby

• The IRS determines that if you generate income from a business (like rental property) in three out of five years, then the business is considered "for-profit." However, if you have negative income in three or more years out of a five-year period, then the business is considered a hobby. The IRS does not consider a hobby a true business, so you may not claim it as a deduction on Schedule C. If you claim it anyway and the the IRS decides to audit your return, you will have to prove that you are constructing the house in order to make a profit, and you will have to explain why the house's construction has taken so long to complete.
  
  

Length of Time

• A deduction for a business loss lowers a taxpayer's social security tax. If the house you are constructing is intended as your primary or secondary residence, you can claim it indefinitely on your taxes. You may be losing money on it, but since it is not a business loss, the loss does not affect your social security. If the house is intended as a business investment, however, you can claim it for two years without triggering an IRS audit. Once you claim three continuous years of losses, the IRS will consider the house a hobby business and will disallow deductions on it.