Interest Deduction-Sch. E or A

[Bird Legs]

Client owns a rental property that had a mortgage against it.
Clients borrows money using home as collateral. He then pays off the mortgage
against the rental property.
Where does client deduct the mortgage interest?
Sched. E-rental expense or
Sched. A -home mortgage interest
Thank you for your help. My mind is not working properly.

[Possi]

personal home

If his personal home is the collateral for the mortgage interest paid, it is on the A.

[veritas]

If I understand correctly the taxpayer borrowed funds on personal residence and paid off rental. Deduct as Sch E interest for rental.

[Bill Tubbs]

Agree.

If I understand correctly the taxpayer borrowed funds on personal residence and paid off rental. Deduct as Sch E interest for rental.

Client basically refinanced the rental. It's just the collateral is different. Client can decide whether to go E or A

Bill

[Possi]

learned something new

everyday I learn something new. I thought the mortgage interest deduction always went with the home that was used as collateral.
hmmmmmmmmm

[Bees Knees]

Client owns a rental property that had a mortgage against it.
Clients borrows money using home as collateral. He then pays off the mortgage
against the rental property.
Where does client deduct the mortgage interest?
Sched. E-rental expense or
Sched. A -home mortgage interest
Thank you for your help. My mind is not working properly.

The taxpayer can deduct interest on up to $100,000 of home equity debt on Schedule A as mortgage interest. If the debt exceeds $100,000, the interest on the excess debt would not be deductible because the debt is not acquisition or home improvement debt.

The taxpayer does have the option to elect to treat the home mortgage interest as not being secured by the taxpayer's home. (See TTB, page 4-11) By making this election, the debt would no longer be limited to $100,000 home equity debt. It would all be deductible as business interest on Schedule E provided the taxpayer can trace the debt to the rental activity.

[jainen]

Problem is

>>provided the taxpayer can trace the debt to the rental activity<<

Problem is, he CAN'T trace the debt to the rental. Not a dime of the loan proceeds was used to acquire or improve the rental property, or even to pay for repairs or other operational costs. Furthermore, the disallowance is permanent. He can't restore Schedule E deductions by putting a new loan on the rental. From a tax point of view, this was not that good a decision.

[Jesse]

So if I have rental property that has a variable rate and I refinance to lock in a lower rate you are saying I can no longer deduct my interest because I used the money to pay off an existing loan and not to directly purchase or improve the rental property?

[jainen]

Different question

Different question. You are asking about restructuring the debt. In the original post, the loan was paid off.

[OldJack]

Different question. You are asking about restructuring the debt. In the original post, the loan was paid off.

Depends upon how the bookkeeping is done and what entity owns the rental property. Just because the loan to the original mortgage was paid off does not mean that the rental property does not have a mortgage due to the owner that paid it off. Taxpayer probably has an option to deduct on Sch-A or Sch-E.

[veritas]

I would imagine the money was distributed to payoff the old loan at closing of new loan. All reflected on Hud-1. No problem with tracing rules. Deductible on Sch E.

[Bees Knees]

Different question. You are asking about restructuring the debt. In the original post, the loan was paid off.

No, they are the exact same thing. The original post said the loan was paid off WITH the refinanced money from the new loan.

Same thing. It is traced to the rental. 100% fully deductible on Schedule E.