Taxpayer had rental house for several years; at end of 2005 renter moved out and taxpayer began making improvements/repairs to house in 2006. In September of 2006 taxpayer did a like-kind exchange on rental for two other rentals. My question is how the mortgage interest would be handled in 2006. If house was not rented at all in 2006, then interest could not be taken on schedule E, so should it be taken on schedle A as investment interest? Or am I incorrect about not taking interest on schedule E?
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certainly not on schedule e
So this means it's investment interest on schedule a. Of course the deductibility thereOriginally posted by peggysioux View Post
is limited by investment income you know, so that might mean no deduction.
Last choice then is to capitalize interest onto basis of property traded.
At least it's not lost.ChEAr$,
Harlan Lunsford, EA n LA -
Intent
This all hinges on intent, not what actually happened.
Did renter move out volunarily or was lease not renewed so taxpayer could make mprovements? If voluntary, and taxpayer took advantge to do improvements but still intended to rent it when finished then the business use remained as RRE. If intent was to make improvements to sell it and events carried over to another tax year then perhaps taxpayer converted business use from RRE to investment.
In either case I would keep the interest with the business use and either report it on Sch E (if intent was to remain as rental) or add to basis and carry it over in the 1031 exchange.John Rumbold, EA, CFP(R)Comment
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Somebody with a better memory
than me may recall a similar case. The up shot was the taxpayer was allowed interest, taxes and depreciation while restoring his rental property.Comment
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