Mortgage interest on rental

[ED SMITH]

Client has a commercial rental property which was purchased for $150,000. After a number of years he refied it at $750,000. There were no improvements to the property.
His interest is $50K/yr.

What are the rules for deducting the interest? The year in question is 2000, although the refi was before that. . (He is just getting caught up).

The building later burned down - see the next question.

Thanks to all in advance.

[Ken]

Mortgage intrest

Off the top of my head I dont know of any special rules for mortgage intrest. If he gets a 1099 mortgage intrest statement,then I would think he could deduct it.
Now someone might come on here and make me look stupid, but thats my two cents.

[Bees Knees]

You have to following the interest tracing rules. Any deduction for interest must be traced to the purpose for the debt. The only exception to this rule is home mortgage interest. It doesn't matter what you used the loan proceeds for on home mortgage interest. On rental interest, it does matter. Even if the mortgage company gives you a 1098 for the interest on your rental, it cannot be deducted unless you can trace the proceeds to some kind of use in the rental activity.

See TTB, Tab 4 for the interest tracing rules.

[Kram BergGold]

addition to Bees comment

From your post, the money borrowed was not used for the rental property. However if you can trace the borrowings to another business, rental or investment activity you can deduct the interest against those persuits. Any borrowings traced to non business, rental,or investment activities results in non deductible interest.

[TMAC]

Refinancing on rental property in excess of acquisition debt is NOT deductible for that property's Schedule E unless used to improve that property. $$ may be deductibel elsewhere depending on use of funds.,

[Bees Knees]

Refinancing on rental property in excess of acquisition debt is NOT deductible for that property's Schedule E unless used to improve that property. $$ may be deductibel elsewhere depending on use of funds.,

Well, yes, almost.

Acquisition debt is a term only used for mortgage interest on the taxpayer's residence, whether it is the first or second home.

All other interest, such as business interest and investment interest falls under the interest tracing rules.

Yes, it is true that interest on the rental traced to acquiring the property or improving the property is deductible.

But it is also true that if you take out an equity loan on your rental property and use it in the rental business to pay for supplies, or any other expense directly related to the rental activity, then that interest is also deductible.

In other words, as long as you can trace the use of the loan proceeds to the rental activity, the interest is deductible, even if the use was not for acquiring or improving the property. What you can’t do is take out an equity line of credit on your rental, use the proceeds to purchase a car for personal use, and deduct the interest, even if the mortgage company gives you a 1098 for the equity loan interest paid.