Schedule A or Schedule E

[NotEasy]

Taxpayer borrowed a loan from his main home and used it for down payment to buy a rental property. Does he claim the mortgage interest on Schedule A as itemized deduction or on Schedule E as rental expense?

[BHoffman]

Hi NotEasy - I think your answer is in IRC Sec 163

Try looking up "interest tracing rules".

Here is a link to a discussion held here:

http://www.thetaxbook.com/forums/showthread.php?p=88159

[Gene V]

TTB 4-11

Election to Treat Home Mortgage Interest as Business
Interest

A taxpayer can elect to treat debt secured by a home as not secured
by a home [Reg. §1.163-10T(o)(5)]. This election is advantageous
when home mortgage proceeds are used for business purposes.

Example: Bob took out a $250,000 home equity loan for direct mailing
costs to advertise his business. None of the loan qualifi es as acquisition
debt, and only $100,000 qualifi es as home equity debt. Bob elects
to treat the entire debt as not secured by his home. Assuming he can
trace the debt proceeds to his business, Bob can deduct the interest
paid on Schedule C.

Election. The election applies for the year of the election, plus
all subsequent tax years. The election cannot be revoked without
IRS consent.


Tracing rules would come into play if the loan was not a qualified loan.
In your case your loan is probably a Home Equity loan which qualify
for deduction on schedule A.

[ChEAr$]

TTB 4-11

Election to Treat Home Mortgage Interest as Business
Interest

A taxpayer can elect to treat debt secured by a home as not secured
by a home [Reg. §1.163-10T(o)(5)]. This election is advantageous
when home mortgage proceeds are used for business purposes.

Example: Bob took out a $250,000 home equity loan for direct mailing
costs to advertise his business. None of the loan qualifi es as acquisition
debt, and only $100,000 qualifi es as home equity debt. Bob elects
to treat the entire debt as not secured by his home. Assuming he can
trace the debt proceeds to his business, Bob can deduct the interest
paid on Schedule C.

Election. The election applies for the year of the election, plus
all subsequent tax years. The election cannot be revoked without
IRS consent.


Tracing rules would come into play if the loan was not a qualified loan.
In your case your loan is probably a Home Equity loan which qualify
for deduction on schedule A.

Ah yes, the old 10T rule. Remember that an election has to be made on the return, meaning an affirmative statement with the return.