Points on Refi When Home Becomes Rental

[Sandy26]

Hi Everyone,

I have a client who purchased a property which was a 2nd home and then refinanced the loan in 2006. In 2006, we started amortizing the points over the life of the refinanced loan on Schedule A. In September of 2007, my client decided to turn the 2nd home into a full-time rental. What is the correct way to deal with the remaining points being amortized after the home becomes a rental?

Thanks for your help, Sandy

[ChEAr$]

Continue to march

i.e. continue to amortize points pro rata monthly.

[S T]

Points

Show the Amortization of Points on Refi on Schedule E Rental, rather than Schedula A Itemized Deductions.

Sandy

[Sandy26]

Thanks

Harlan & Sandy,

Thanks for your help!

Sandy

[Davc]

The above is correct assuming the refi was only for acquisition debt. The points being amortized must be pro rated if any of the debt was equity debt and the portion attributable to equity debt is now not deductible anywhere.

[Bees Knees]

The above is correct assuming the refi was only for acquisition debt. The points being amortized must be pro rated if any of the debt was equity debt and the portion attributable to equity debt is now not deductible anywhere.

Yes and no.

The portion attributable to equity debt must be traced to the rental activity in order to be deductible. So for example, you have two mortgages on a house converted to rental. The primary mortgage can be traced to acquisition debt, which is now fully deductible on Schedule E. The home equity debt along with points being amortized can be traced to home improvements made several years ago. That too is fully deductible on Schedule E. However, if the home equity debt along with points being amortized is traced to the purchase of a new car, neither the home equity debt interest nor the points being amortized are deductible on Schedule E, since they cannot be traced to the rental activity.