Mortgage Interest On Rental Property

[RWG1950]

Customer had a personal residence with no mortgage owed.
She still lives there.
In 2017 she bought a small rental property, financed per re-fi of her personal residence.
So the loan is apparently secured by her personal residence.
But the loan proceeds were used 100% for the purchase of the rental property.
Don't know why she did it this way.
Can this mortgage interest be used on her rental schedule "E" ?
Thanks for comments

[TaxGuyBill]

Yes, it is fully deductible on Schedule E.

For business and rental interest, the loans can be from any source and do not require the business or rental property to be secured by the loan.

[Dude]

If she has a loss on the rental and if she is up for it, she could move into the second home for at least 10% of the days it is held out for rent and then it qualifies as a second home and she can deduct the home equity interest on schedule A. A lot of ifs, like loan totals being under $750k but her choice of financing gives her options .https://www.irs.gov/publications/p93...link1000229904

[Gene V]

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?

[Dude]

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?

If the loan for the rental increased the total outstanding loans for both properties to more than $750k then you would want to make the election. Just to be clear though, the client did not use the loan to purchase a rental. They used it to buy a second home they decided to rent out.

[Rapid Robert]

If she has a loss on the rental and if she is up for it, she could move into the second home for at least 10% of the days it is held out for rent and then it qualifies as a second home and she can deduct the home equity interest on schedule A. A lot of ifs, like loan totals being under $750k but her choice of financing gives her options

It was identified as a rental from time of purchase, not a second home. Turning the property into a personal use rental would eliminate many rental deductions. No one can deduct home equity interest on Schedule A. There, did I get them all?

[Dude]

It was identified as a rental from time of purchase, not a second home. Turning the property into a personal use rental would eliminate many rental deductions. No one can deduct home equity interest on Schedule A. There, did I get them all?

Lets go through each point slowly:

It was identified as a rental from time of purchase, not a second home. By a poster who does not "know why" someone would secure a rental with a primary residence. Do you really think it is beyond the realm of possibility that the client does not want to consider all alternatives available? Critical thinking is an important tool to employ in these situations. You do know that the purpose of the second mortgage can only be decided by the client? Do not make decisions for them.

Turning the property into a personal use rental would eliminate many rental deductions. Such as? If you recall I offered this as an option in case the rental is losing money. Maybe just maybe the client would like to take some of interest off of schedule A as opposed to directing it all to Schedule E. Again, it will require her to be flexible with her living situation, but then again, that is what I said originally.

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?

[Anarchrist]

If she has a loss on the rental and if she is up for it, she could move into the second home for at least 10% of the days it is held out for rent and then it qualifies as a second home and she can deduct the home equity interest on schedule A.

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.

[Anarchrist]

Such as?

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

[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.

[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.

[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."

[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.

[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.

[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".