Rental property mortgage refinanced

[NotEasy]

Taxpayer consolidated his home's mortgage loan and rental property's mortgage loan into one loan last year, and he only used his home as the collateral. Because of the trace rule, I think part of the mortgage interest of the new loan can still be claimed in Schedule E as expense of the rental property. My question is how to allocate the interest of the consolidated loan. I am thinking to do the allocation based on the principal of the two loans right before the refinancing.

Opinion?

[taxea]

What was the reason for the refi? Did he payoff the rental mortgage in full? You need more info before deciding. Normally I would use the basis on each to get the allocation percentage.

[Jesse]

Taxpayer consolidated his home's mortgage loan and rental property's mortgage loan into one loan last year, and he only used his home as the collateral. Because of the trace rule, I think part of the mortgage interest of the new loan can still be claimed in Schedule E as expense of the rental property. My question is how to allocate the interest of the consolidated loan. I am thinking to do the allocation based on the principal of the two loans right before the refinancing.

Opinion?

The interest tracing rules do not apply to qualified mortgage interest. You must elect to treat the home mortgage interest to other than qualifed residence interest

http://www.thetaxbook.com/forums/showthread.php?t=16700&highlight=interest+tracing+rules

The above thread is a good discussion. Also look at TTB page 4-14 and Pub 535.