Another Mortgage Interest

[S T]

I think I know, but I guess I need confirmation.

T/p owns a personal residence (A), paid off, so no mortgage.

Takes an equity line out for $250,000 (12/06) to place a manufactured home on acreage they purchased. T/p then moves into the new manufactured home claiming that as their new personal residence. (B)

The $250,000 line of credit mortgage interest then becomes non deductible mortgage interest as it is not secured on their new personal residence, correct?

Subsequently t/p then rents out the original personal residence (A) and none of the mortgage interest secured by that property can be deducted unless proceeds are traced to that property, correct?

So t/p has non deductible mortgage interest for 2007?

Sandy

[Snaggletooth]

Don't Know

Sandy, don't know for positive, but as I understand it, you are correct.

And if you are correct, this is an example of very poor tax planning. Such a person could not have made these moves any worse than this.

Correctable, though, to the extent he may refinance his new mobile home and pay off the other loan with the proceeds. Possible that his "new" home may not appraise for as much, but to the extent it can, it would convert non-deductible interest to a Sch A deduction.

[DonPriebe]

Slightly disagree

The $250,000 line of credit mortgage interest then becomes non deductible mortgage interest as it is not secured on their new personal residence, correct?

At this point the previous main home has become a second home. It is generally not necessary to live in a second home at all unless you also rent it out. (Pub 936) So the interest on $100K of the debt is deductible as home-equity mortgage interest.

After he converts it to a rental I generally agree.

[OtisMozzetti]

Mortgage allows t/p to keep the rental property

I would want to argue that the mortgage on the original property A is what allows the t/p to carry (hold on to) property A which has become used as a rental property. Thus, that interest would go onto the Schedule E.

That would be my argument about how the loan proceeds are to be "traced". I don't know whether the IRS would accept the argument, however.