Harvey is employed by the U.S. Customs Service. Early in the year, he accepts a position in the London office. In addition to a raise in his pay grade, the terms of the London assignment let Harvey collect a monthly living quarters allowance (LQA) for rent and utility expenses. The LQA is exempt from tax under Section 912(1)(c). Upon arriving in London, Harvey and his wife are unable to find suitable quarters to rent. They subsequently purchase a flat for $160,000. During the current year, they pay $10,000 in mortgage interest on the loan used to purchase the flat and $1,300 in property taxes on the flat. The total LQA Harvey receives for the year is $11,000.
Harvey was talking to a military attache´ in the office and was surprised to hear that military personnel are allowed to deduct the interest and taxes they pay on their homes even though they receive an LQA comparable to that received by Harvey. He would like to know whether the same treatment is available for his mortgage interest and property taxes.