Mortgage Interest On Rental Property

[Dude]

YES I DO! https://www.irs.gov/newsroom/interes...-under-new-law

Look at example 2 it states that taxpayer took out equity on main home to purchase a vacation home then the interest on the home equity loan would NOT be deductible.

It only works if each home has its own loan and under the $750,000.

But this isn't a vacation home. It is a second home that is used as a rental but as stated originally, could be converted back to personal use if lived in for more than 10% of the days held out as a rental.

[nwtaxlady]

Do you have a link to your source? Here is my source https://www.irs.gov/publications/p93...link1000229902 IRS has issued guidance on adding both mortgages together for the purpose of them not exceeding the $750k max. I do not understand why they would do that if the second home is not allowed to be secured by the first home.

YES I DO! https://www.irs.gov/newsroom/interes...-under-new-law

Look at example 2 it states that taxpayer took out equity on main home to purchase a vacation home then the interest on the home equity loan would NOT be deductible.

It only works if each home has its own loan and under the $750,000.

[Anarchrist]

tell me how someone with a loss would pay less tax by taking unused interest on schedule A.

Gee, how would not taking a loss (thus increasing agi) so you can take only a portion of the deductions on schedule A increase total tax? It's called basic math. When taxable income increases, income tax goes up. Nowhere in the op does it state the interest would be unused. In fact, the op specifically states it would be used.

[Lion]

Straight from the horse's mouth, see the IRS's Example 2:

https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

[Dude]

DUDE, I disagree! New rules under TCJA, now the 2nd home has to be secured by the 2nd home. It has to have its own loan. Can NOT be secured by the personal residence. Yes, they can have a 2nd home, however, the 2nd home has to be secured by the 2nd home. Can not be secured by the personal residence. I have been to several tax seminars that stated this.

Do you have a link to your source? Here is my source https://www.irs.gov/publications/p93...link1000229902 IRS has issued guidance on adding both mortgages together for the purpose of them not exceeding the $750k max. I do not understand why they would do that if the second home is not allowed to be secured by the first home.

[nwtaxlady]

It qualifies if you can call it a second residence. I already pointed out how she can do this and simultaneously take the home equity interest on schedule A. Sometimes our job requires more than data entry.

DUDE, I disagree! New rules under TCJA, now the 2nd home has to be secured by the 2nd home. It has to have its own loan. Can NOT be secured by the personal residence. Yes, they can have a 2nd home, however, the 2nd home has to be secured by the 2nd home. Can not be secured by the personal residence. I have been to several tax seminars that stated this.

[Gene V]

Yes, but from what I understand, the "election" is to just report it as non-home interest. In other words, reporting the interest on Schedule E satisfies the "election".

If that is true, that makes it a lot easier, I thought you would have to have a written election and attach it to your return.

Thanks

[Dude]

We are not communicating directly with the client here. We only know what the original poster told us. Why are you making things up? You stated, "They used it to buy a second home they decided to rent out.". That is not the fact as stated.

You have the critical thinking skills of the home depot associate who thinks customers enjoy having the back of the box read to them. So if a client does not realize their RV can be called a vacation home you are not going to suggest it?



You see, there was new law commonly referred to as TCJA. Here, let me quote you a part, since your tax update CE seems to be sorely lacking:

SEC. 11043(a). Limitation on deduction for qualified residence interest. " Section 163(h)(3) is amended by adding at the end the following new subparagraph: “(i) IN GENERAL.—In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—

“(I) DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST.—Subparagraph (A)(ii) shall not apply."

It qualifies if you can call it a second residence. I already pointed out how she can do this and simultaneously take the home equity interest on schedule A. Sometimes our job requires more than data entry.

[TaxGuyBill]

I agree with using the resident home mortgage interest deduction for Investment property (Schedule E),

However, do you not have to make a election to treat the mortgage interest as not secured by the home.[ Reg.§ 1.163-10T(o)(5)]. in order to take the deduction?

Yes, but from what I understand, the "election" is to just report it as non-home interest. In other words, reporting the interest on Schedule E satisfies the "election".

[Dude]

Most everyone here realizes there are options. Most everyone also realizes taking the interest on sch A is more likely to result in additional tax and a more complicated rental situation.

Oh, you must be the board spokesperson.. I must take umbrage with the term "more than likely". I find people who use this term are usually lazy thinkers. Please tell me how someone with a loss would pay less tax by taking unused interest on schedule A. This person has a unique loan situation, they should maximize its use.

[Anarchrist]

Most everyone here realizes there are options. Most everyone also realizes taking the interest on sch A is more likely to result in additional tax and a more complicated rental tax situation.

[Rapid Robert]

You do know that the purpose of the second mortgage can only be decided by the client? Do not make decisions for them.

We are not communicating directly with the client here. We only know what the original poster told us. Why are you making things up? You stated, "They used it to buy a second home they decided to rent out.". That is not the fact as stated.

No one can deduct home equity interest on Schedule A. This is just plain wrong. Do you work with for the same firm that employs the poster who was confounded by the standard deduction?

You see, there was new law commonly referred to as TCJA. Here, let me quote you a part, since your tax update CE seems to be sorely lacking:

SEC. 11043(a). Limitation on deduction for qualified residence interest. " Section 163(h)(3) is amended by adding at the end the following new subparagraph: “(i) IN GENERAL.—In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—

“(I) DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST.—Subparagraph (A)(ii) shall not apply."

[Dude]

See Sch E lines 5 thru 19 https://www.irs.gov/pub/irs-pdf/f1040se.pdf

You do realize this is not an either or situation with this type of loan, don't you? Again, this loan offers an option IN ADDITION TO accumulating the standard rental expense. All you have to do is click the link I posted and big brother will explain it all.

[Dude]

Why do that when you could just rent it out and record everything on sch E to take the rental loss? That would have to be a much better deal.

If property was rented in a vacuum I would agree. As a landlord, I know the difference between a great investment and a stroke is the quality of your tenant and the quality of your handyman. Maybe this client has a good tenant lined up but they can't get out of their current lease. Maybe their good tenant had to suddenly vacate and they dont want to be rushed into settling for someone they can properly vet. The nature of this loan give the owner options other types of loans don't have. Our job is to make them aware of what they are.

[Anarchrist]

Such as?

See Sch E lines 5 thru 19 https://www.irs.gov/pub/irs-pdf/f1040se.pdf