Interest Tracing - again

[Zee]

I know there's another thread, and the question has probably been answered before. But, I just want to make sure I understand, so I'd really appreciate a quick reply from you more learned folks.

If the proceeds of a loan on a rental property are used for two purposes (1) to improve a second rental property, and (2) to purchase a business. Can the interest on the loan be deducted as "investment interest"?

Thanks in advance for your help.

[Zee]

C'mon guys say something

I'll even accept an insulting response (although it isn't preferred).

[S T]

I'll try

If the loan was on the rental property,

proceeds used partially for improvements to a 2nd rental property = deduct interest allocated on that rental schedule E

proceeds used partially for Schedule C business = deduct interest allocated to business portion Schedule C

See TB page 4-14 and Pub 535.

Sandy

[Zee]

OK. Thanks. Since the 2nd rental property is being remodeled for rental, I'll deduct that interest portion on Schedule A as Investment Interest, and allocate the other interest to the Schedule E. I just wanted to confirm this handling was correct, although I think others might suggest the interest pertaining to the 2nd property improvements should be capitalized.

[S T]

So

So the 2nd rental, isn't a rental yet??

Since the 2nd rental property is being remodeled for rental, I'll deduct that interest portion on Schedule A as Investment Interest,

and allocate the other interest to the Schedule E.

You do mean Schedule C, right.

Sandy

[Zee]

So the 2nd rental, isn't a rental yet??

You do mean Schedule C, right.

Sandy

Oops. Neither. Sch A for the Investment interest on 2nd Rental. 1120-S for the business interest. Rental #1 and business are segments of an LLC with S-Corporation election.

[S T]

Gets more complicated

You hadn't shared that information, maybe back to the research!

Old Jack is good at this type of tracing when it involves entities.

Sandy

[Zee]

You hadn't shared that information, maybe back to the research!

Old Jack is good at this type of tracing when it involves entities.

Sandy

Yes, "Old Jack" seems to be a good resource for almost any tax question. I think he cautioned that using an S-Corporation's asset (rental property 1) as the collateral for an equity loan, then using the proceeds for another rental property (property 2) outside of the S-Corporation wasn't a good idea. Of course, that's correct. But, I can't change that. However, I don't think it should change the deductibility of that amount as "investment interest".

[Snaggletoof]

Form 4952

This is an eternal mystery.

If you follow the definition of "Investment Interest", it would encompass interest deducted on rental property. But no one (including myself) does this -- we attach the interest to the schedule E.

Nevertheless, it has to be true that any money borrowed for purchase of rental property or improvements is in reality "investment interest." Only money borrowed for operations would not be 4952 stuff.

Maybe the distinction can be made that 4952 interest is "invest and hold" interest, while other interest is "invest and operate" interest. Whadd'ya think???