Mortgage Loan Interest

[TaxAddict]

Taxpayer borrowed a loan from a rental property in 2006 and he planned to use the proceeds to improve the rental property. He got the loan. But then he changed his mind and decided not to do the improvement later. The loan is paid off in 2007.

Does the mortgage interest that he paid on that loan in 2006 deductible as rental expense?

[veritas]

If he

did not use the funds for the rental it is not a rental expense.

[veritas]

Where did

the taxpayer keep the money?

[TaxAddict]

the taxpayer keep the money?

I am not sure if I understand your question correctly.

Are you asking about the timeline? The taxpayer applied for the loan. He got it. The loan proceeds was deposited in the bank account of the taxpayer and stayed there. Then the taxpayer changed his mind and not to do the improvement. So he decided to pay off the loan.

[TaxAddict]

did not use the funds for the rental it is not a rental expense.

Even if the intention of the loan is to make improvement at the rental property?

According to the taxpayer, he has not used the loan proceeds for any other purpose.

[jimmcg]

If a case can be made that the intent was to use the loan proceeds for improvements to the rental property, the loan proceeds were temporarily held intact in a bank account for the rental property, due to circumstances not originally anticipated by the taxpayer the loan was not needed for the rental property, and then the loan was returned intact to the lending institution I would certainly consider the interest costs deductable against the rental income derived from the property.

[Kram BergGold]

Investment interest

To me, the borrowed funds sat in a bank account. They were not used to fix up the property. Therefore, I would deem the interest investment interest.

[dsi]

I don't know the answer, however...IMHO if the borrowed funds were deposited into the rental bank account (not the individuals personal account), with the intent of making improvements on the rental itself and the taxpayer subsequently changed his mind and instead used the same money to pay back the loan, I would most likely put it on Sch E.

However, some tax research may tell me otherwise.

[jainen]

nothing to do

>>the intent of making improvements<<

Whatever he now claims that his original plans had been, it is clear that the only thing he actually did was fund a low-yield investment. I agree with Kram. The use of the loan proceeds had nothing to do with the rental.