Mortgage interest deduction

[Questionguy101]

Taxpayer borrowed a loan from their main home to purchase a rental property. Where do they claim the deduction of the mortgage interest paid?

Turbotax website says: "If you used the proceeds of a home loan for business purposes -- money borrowed through a cash-out refinancing, say, or a home-equity line of credit -- deduct that interest on Schedule C if you are a sole proprietor and on Schedule E if the money was used to purchase rental property. The interest is attributed to the activity for which the loan proceeds were used.">

So according to them, the mortgage can be claimed on Schedule E as rental expense. Is it correct?

[jerome]

The tax book page 4-11 says there is an election to treat home mortgage interest as business interest. That would allow you to claim the interest expense on Schedule E rather than as mortgage interest on Schedule A. It also would avoid your $100,000 home equity debt limitation for mortgage interest, as there is no limitation on Schedule E.

[Questionguy101]

The tax book page 4-11 says there is an election to treat home mortgage interest as business interest. That would allow you to claim the interest expense on Schedule E rather than as mortgage interest on Schedule A. It also would avoid your $100,000 home equity debt limitation for mortgage interest, as there is no limitation on Schedule E.

Do you have to do anything special to make the election? Or they just go by what you do in the first year?

[jerome]

The tax book does not say.

Taking a quick glance at the cited regulation, it is silent as well. Usually that means you just do it and that makes it an election.

[jainen]

Most preparers just do it

>>you just do it and that makes it an election<<

Most preparers just do it like that, but technically you are supposed to make a formal election to not treat the expense as qualified home mortgage interest, thus invoking the tracing rules. Whether formally done or not, the election is irrevocable. If they later sell the rental the interest would become non-deductible--they could not fall back on the $100,000 home equity limit.