Mortgage Interest personal vs rental

[Bonnie]

Customer asked me a question. Currently he owns a rental duplex that both sides are rented. Future plans he is going to refinance the rental and move into one unit. Farther in future he is going to build a house for his family and move again once it is completed. (He is a builder). His question has to do with the fact he has some money saved that he was going to use when he built his personal home. Now he wonders if it would be better to use this when he refinances the rental duplex or better to save and use for the personal home. (Asking from a tax stand point). I have thought about this for a few days and it doesn't seem to make much difference from a tax stand point that I can think of. He either has lower interest on his Sch A if he uses for personal home or less expense on
Sch E. Seems to me would come out same where ever he put it. Wanted to run this by others who might think of something I'm missing before I get back to him.

[Kram BergGold]

My thoughts

In some states interest on E is a deduction while interst on A is not. Also interest on E lowers AGI which could be a factor. You should warn him that if he refinances E to pull money out to build the house on A that he will lose some of the interest deduction.

[kathyc2]

Like Kram pointed out the A deduction would likely not count for state tax. What AGI difference items may apply to client? Amount of SS taxable, phaseout of child tax credit, ACA premium credits, net investment tax, retirement funding phaseout, floor A deductions among others should all be taken into account if applicable. Also, are A deductions already high enough that any additional interest on primary receives full tax benefit?

That said, I don't think your client would be doing himself any favors to base how to finance solely on tax. Properly structured financing to obtain lowest interest on both properties will likely contribute to his overall financial benefits more than any tax deduction.

[Bonnie]

Thanks for response. I am in Kentucky and therefore do have a Sch A on state return so yes the home mortgage interest is deductible here. And yes he can use mortgage interest on federal Sch A. Big giver so he does itemize. The point about lowing AGI is very good point. And yes I agree not to base decision on tax consequences. Just glad some people do think ahead and ask just in case there would be something to consider. Thanks again.