CHANGES TO DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.

SEC. 10102. CHANGES TO DEDUCTION FOR QUALIFIED RESIDENCE INTEREST. (a) General Rule.— Paragraph (3) of section 163(h) (defining qualified residence interest) is amended to read as follows: 101 STAT. 1330–385 “(3) Qualified residence interest.— For purposes of this subsection— “(A) In general.— The term ‘qualified residence interest’ means any interest which is paid or accrued during the taxable year on— “(i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or “(ii) home equity indebtedness with respect to any qualified residence of the taxpayer. For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued. “(B) Acquisition indebtedness.— “(i) In general.— The term ‘acquisition indebtedness’ means any indebtedness which— “(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and “(II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. “(ii) $1,000,000 LIMITATION.—The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return). “(C) Home equity indebtedness.— “(i) In general.— The term ‘home equity indebtedness’ means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed— “(I) the fair market value of such qualified residence, reduced by “(II) the amount of acquisition indebtedness with respect to such residence. “(ii) Limitation.— The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual). “(D) Treatment of indebtedness incurred on or before october 13, 1987.— “(i) In general.— In the case of any pre-October 13, 1987, indebtedness— “(I) such indebtedness shall be treated as acquisition indebtedness, and “(II) the limitation of subparagraph (B)(ii) shall not apply. “(ii) Reduction in $1,000,000 limitation.— The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre-October 13, 1987, indebtedness. 101 STAT. 1330–386 “(iii) Pre-october 13, 1987, indebtedness.— The term pre-October 13, 1987, indebtedness’ means— “(I) any indebtedness which was incurred on or before October 13, 1987, and which was secured by a qualified residence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or “(II) any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing). “(iv) Limitation on period of refinancing.— Subclause (II) of clause (iii) shall not apply to any indebtedness after— “(I) the expiration of the term of the indebtedness described in clause (iii)(I), or “(II) if the principal of the indebtedness described in clause (iii)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).” (b) Conforming Amendments.— Subsection (h) of section 163 is amended by striking out paragraph (4) and by redesignating paragraph (5) as paragraph (4). (c) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1987.