Mortgage proceeds on 2nd home used to improve/repair rental

[AZ-Tax]

Client borrowed on 2nd home and used all loan proceeds to improve/repair her rental. Client states rental is Manf home and could not locate a lender to loan on a manf home. So, is the mortgage interest deductible on Sch E?

[Bill Tubbs]

Either Sch A or Sch E

By using the tracing rules, since the loan was for the rental, the loan can be treated for tax purposes as a loan for the rental property and the interest go on Sch E.

OR

Since it was a home equity loan, the interest could go on Sch A (if all other requirements are met).

Bill

[Gretel]

Since we don't have any figures, home equity is limited to $100,000 total. It's so easy to forget or not to take already existing equity loans into account.

[ChEAr$]

By using the tracing rules, since the loan was for the rental, the loan can be treated for tax purposes as a loan for the rental property and the interest go on Sch E.

OR

Since it was a home equity loan, the interest could go on Sch A (if all other requirements are met).

Bill

Either/or is okay of course, but given the choice, with a schedule a and medical deductions
as possible, it's schedule e in order to lower AGI.

[peggysioux]

Mortgage Interest Used on Rental Improvements

The flip side to think about is does taxpayer usually have a loss on schedule E have AGI over $150,000 thus making schedule E losses non-deductible in current year.

[Kram BergGold]

election

The interest can't be legallt deducted on Schedule A. It must be traced to Schedule E. The proper election has to be made in writing on the return. If this rental stops being rental or is sold the mortgage interest is nolonger deductible so make sure they understand that they have to pay off the loan..

[erchess]

Two Questions

The interest can't be legallt deducted on Schedule A. It must be traced to Schedule E. The proper election has to be made in writing on the return. If this rental stops being rental or is sold the mortgage interest is nolonger deductible so make sure they understand that they have to pay off the loan..

First I'd appreciate a cite.

Second if there is no choice, is the taxpayer really making an election or simply putting a possibly required statement on the return?

[Kram BergGold]

Election

The election is under regulation 1.163 - 10T (O) (5)

[Gretel]

Not in my office. I think the election is called T-10 election and needs to be attached to the tax return every year.

I still stand by my earlier statement that interest is deductible on Sch. A as long as it qualifies as equity interest.

[Jesse]

The election is under regulation 1.163 - 10T (O) (5)

The election is to treat the debt as not secured by your home. Here is a similar thread.

http://www.thetaxbook.com/forums/showthread.php?t=7570&highlight=Election+treat+interest+home

[ChEAr$]

The election is under regulation 1.163 - 10T (O) (5)

Thus since it is an election, the interest may be deducted on schedule a if desired. erchess
was right.

[veritas]

What

election statement must be attached to the return?

[Jesse]

I believe you need to attach the statement to treat the debt secured by the home as not secured by home under Reg Section 1.163-10(o)(5) in the first year only as once the election is made it is not revocable without consent of the IRS.

Maybe someone can correct me if this is not true.

[Gretel]

You are correct, Jesse. If we made this election for the client and the form was attached to the tax return it should be OK. However, if this election was made in the past and and no proof exists that this election was made, I would attach a statement to the current year tax return.

Since I don't trust the computers, I would mail it in.