In a recent court case (TC Summ OP. 2011-17) the Tax Court allowed an interest deduction for a house that was never built. A married couple took out a loan and bought a beachfront home, tore it down and planned to build a new house on the site. However, they could not do so until a state environmental agency granted them a permit. That process dragged on for two years. By that time, the local real estate market had crashed and the couple couldn’t get a loan to cover the construction costs, so they sold the land at a loss.