Mortgage Interest Deduction

[S T]

If t/p refinances his rental units and includes the payoff of his primary residence, then that portion becomes non deductible mortgage interest, correct?

Sandy

[OldJack]

I assume you are talking about a personal tax verses some corporate or partnership. An individual can mix his funds for personal and business without much concern. If the rental property ends up with a mortgage on its property after all is said and done it is a business interest deduction for the rental property. I would deduct the interest on 1040 Sch-E.

[Matt Sova]

Tracing

I think you need to track how much of the debt went to pay off the personal house and that percentage then goes to Schedule A and the balance against Rental Income.

[OldJack]

I agree that you could allocate to Sch-A under tracing rules, but it is not necessary and is questionable (see quote). For a valid mortgage on the rental property it does not require the owner to keep the money invested in a rental property account or spend it on the rental property.

You can deduct your home mortgage interest
only if your mortgage is a secured debt. A
secured debt is one in which you sign an instru-
ment (such as a mortgage, deed of trust, or land
contract) that:
Makes your ownership in a qualified home
security for payment of the debt,
Provides, in case of default, that your
home could satisfy the debt, and
Is recorded or is otherwise perfected
under any state or local law that applies.

In other words, your mortgage is a secured
debt if you put your home up as collateral to
protect the interests of the lender. If you cannot
pay the debt, your home can then serve as
payment to the lender to satisfy (pay) the debt.
In this publication, mortgage will refer to secured
debt.

[Jesse]

The rental units were refinanced, not their home, so there would be no mortgage interest to flow to schedule A. Even if the funds were used to pay off their residence it is no longer secured by their residence.

[jainen]

not what the collateral is

>>For a valid mortgage on the rental property it does not require the owner to keep the money invested in a rental property account or spend it on the rental property.<<

It is true that an owner can do anything he wants with the loan proceeds from the rental. It is not true, if you are implying, that interest on debt not used for the rental can be a tax deduction against rental income. Escept for qualified home mortgage interest, interest is only deductible according to how the borrowed money is used, not what the collateral is.

[OldJack]

Escept for qualified home mortgage interest, interest is only deductible according to how the borrowed money is used, not what the collateral is.

Collateral is talking about secured debt which is required for mortgage interest deduction. Loan proceeds on personal owned rental property does not have to follow tracing rules as the mortgage is simply reflective of owner financing in order to maintain ownership. The financing and payoff is simply a withdrawal of a portion of the owners investment in the property. The mortgage interest is fully deductible on 1040 sch-E.

[veritas]

Are you saying I can borrow money on my rental property, use it for personal purposes and I can deduct it?

[S T]

Rental and Refinance

I think I found it.

Pub 535 Chapter 5, page 16+

states that there needs to be an Allocation of Interest, "You allocate loan proceeds by tracing disbursements to specific uses" "Loan Refinancing - allocate replacement loan to same uses to which the repaid loan was allocated, make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan"

Isn't this saying that I can not use the portion of the refinance that paid of the loan on the primary residence. And I can not put the portion of interest for that on Schedule A as the loan debt is recorded against the rental not the primary residence.

So the most t/p could deduct would be the interest allocated to the paid off loan on the renal , plus any proceeds that might have been used as improvement to the rentals.

Can I allocate the loan costs based on percentage to the rental?

Thanks everyone for your help!

Sandy

Calif refinances are very challenging this year!

[JG EA]

In other words...

You can secure a loan by your home and count it on A or trace it to something else like a business or rental.

You cannot take a loan secured by a rental and use it for personal use, add to your home, or anything else and count it on the E. It is personal interest and not deductible. (And you cannot count it on A because it is not secured by your home.)

[S T]

Headache

Thanks JG,

You stated it perfectly so my tired mind can process!

Sandy

[Bees Knees]

TTB, page 4-14, "Secured loan. Except for home mortgage loan proceeds, the allocation of loan proceeds is not affected by the use of the property that secures the loan."

The example then illustrates that you cannot deduct interest on a mortgage secured by rental property unless the proceeds are traced to that rental property, even if you get a 1098 from the mortgage company reporting the interest.

In other words, no you cannot deduct the interest on Schedule E unless the loan proceeds were used to purchase or improve the rental property.

[DaveinTexas]

I know this post is old

but I am responding to it because I had this come up just recently.

Since the proceeds from the rental were used to pay off or to fund a loan on a primary or secondary residence that is not a rental, the mortgage interest on the refinance are not deductible because the loan is secured by the rental property and the proceeds were not used in the rental activity.

I get that part. But, instead of not deducting the interest, can you make an election to capitalize the unused portion of the interest; adding the interest to the basis of the new property?

[solomon]

"But, instead of not deducting the interest, can you make an election to capitalize the unused portion of the interest; adding the interest to the basis of the new property?"


I don't think that would fit a 266 election because the interest is not deductible in the first place.

[Golden Rocket]

Wise One

Solomon I believe that it can be capitalized, unless specifically denied by statute.

Especially given the IRS proclivity to want to capitalize EVERYTHING during building stage.

You're not wrong very often, though. I just happen to think that ANY ordinary and necessary cost (not expense) is capitalized, if there is a building stage or building acquisition.