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August 25, 2022

Mortgage interest measured as a percentage of property's appreciation is deductible interest, Tax Court holds

In two related opinions (Deitch v. Commissioner and Barry v. Commissioner), the Tax Court has held "appreciation interest" that a partnership paid its mortgagor constituted deductible interest under IRC Section 163, not a payment in respect of an equity interest. The mortgage that the partnership utilized to buy commercial real estate required interest to be paid both as a percentage of profits earned and as a percentage of appreciation in the building. The IRS had disallowed the interest deductions claimed in relation to appreciation of the property.