Personal Use Storage Facility

[equinecpa]

I have a client who build a 10 bay storage facility on land adjoining his principal residence. He refinanced his whole mortgage so it covers both the storage facility and his principal residence. I have been allocating interest based on cost, between Schedule A and his 1065 (storage business is run as partnership with his fiance).

I just realized he uses 2 spaces of the 10 personally. It wouldn't be right to charge the storage facility with the interest for these 2 slots -would the interest be deductible on Schedule A?

My knee jerk reaction was no this is personal interest, but when I rethink it if he had built a separate garage for his 2 cars, I'd have no problem claiming this interest on Schedule A. What do you think?

Carolyn

[jainen]

not deductible at all

>>if he had built a separate garage for his 2 cars, I'd have no problem claiming this interest on Schedule A<<

If the garage was part of his home, the loan would be home acquisition debt. It's a little less certain that these personal units fit that definition, but if the taxpayer has excellent records most preparers could be talked into it.

You should allocate ANY expenses for personal use of business assets. Note that the election to not treat the loan as qualified home mortgage interest is irrevocable, so in my conservative opinion his poor tax planning now means 20% of the interest is not deductible at all.

[equinecpa]

You don't think a change in the % would fly?

I guess the other 20% could be investment expense could it not? (Not currently deductible because I don't think he has sufficient investment income).


Carolyn