How to allocate?

[NotEasy]

Taxpayer refinanced the mortgage of his rental property and used the cash out to buy another rental property. How should the mortgage interest be allocated between the two rental properties?

Supposed the old rental property still had a mortgage of $100,000 on it when it was refinanced.

Supposed the new mortgage is $300,000, of which $100,000 was used to pay off the old loan and $200,000 was used to buy the new rental property. Can the taxpayer should allocate 1/3 of the mortgage interest of the new loan to the old rental property and 2/3 to the new rental property?

[taxmom34]

i'm taking a stab at this, not sure if my thinking is correct . wouldn't the bank be holding the deed on the first mtg, and with the refinance is still holding the mtg on the first rental. soo the interest would only apply to the first rental property. the bank has no hold on the second property, right?

[ChEAr$]

Taxpayer refinanced the mortgage of his rental property and used the cash out to buy another rental property. How should the mortgage interest be allocated between the two rental properties?

Supposed the old rental property still had a mortgage of $100,000 on it when it was refinanced.

Supposed the new mortgage is $300,000, of which $100,000 was used to pay off the old loan and $200,000 was used to buy the new rental property. Can the taxpayer should allocate 1/3 of the mortgage interest of the new loan to the old rental property and 2/3 to the new rental property?

that's exactly the way I would allocate.

[taxea]

I agreed with chears...keep the depreciation as is on the old mortgage and allocate 1/3 to that rental.
If the 2nd property is also a rental then the basis is 200K plus allowed expenses of purchase and the mortgage writeoff interest is 2/3.

[Maribeth]

Wouldn't the tracing rules apply here and the 2/3 interest be allocated to the second property?

Maribeth

[JG EA]

The good thing here is that it is all rental property. At least none has to be allocated to nondeductible.

[S T]

Agree with Maribeth

Since it is rental property, you need to use the tracing rules to allocate the mortgage interest deduction. See TTB 4-14 to begin.

Sandy

[ChEAr$]

Right. Tracing is the key.

One client had a rental, and refinanced with a larger loan to buy another rental plus took some cash for personal use. Now there was a real
lesson in allocation!