Discussion:Easy Mortgage Interest Question - I think...
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Easy Mortgage Interest Question - I think...
Stephanie1 (talk|edits) said: | 7 April 2006 |
| You'll have to forgive me, but my brain is on "tax overload" right now and I am doubting myself on this:
Taxpayer is a disregarded entity that owns a rental property (no personal use, 100% rental to a 3rd party). Taxpayer purchased the rental property by obtaining a 2nd mortgage against their own residence. Now, taxpayer wants to sell their own residence and purchase a new home. Wants to now take a mortgage out on the rental property to use as a down payment for purchase of the new residence. If they do this, the interest on the mortgage secured by rental property would be Sch A interest and not Sch E interest since it is interest paid on monies used to obtain their personal residence, right? Like I said, my brain is on overload right now & that is why I'm questioning myself. Only a few more days left though! | |
| 7 April 2006 | |
| Not deductible as mortgage interest on Schedule A because new home not securing the underlying mortgage. I think. To be qualified mortgage interest, loan must be secured by that home. | |
Stephanie1 (talk|edits) said: | 7 April 2006 |
| JDACPA - Would this qualify as Sch E interest since the rental property is securing the mortgage or is it completely non-deductible?
Thanks | |
| 7 April 2006 | |
| Steph - I believe it would be deductible on the "E". If I had time I would research further but tax piles wait. | |
| 7 April 2006 | |
| NOLO PRESS has an excellent publication "Every Landlord's Tax Deduction Guide" - it is about $30. I think they explain this - so long as you can trace application of proceeds within 30 days. Seems like you are just trading one loan for another. | |
Stephanie1 (talk|edits) said: | 8 April 2006 |
| Thanks All!
I also just found this in Pub 936: "Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities." I would say that the rental property could qualify as their second home, which they choose to rent out. There is no clear definition of a "second home" that I can find anywhere. I will also check out the publication, Jake. Thanks again | |
| 8 April 2006 | |
| If the rental property was in a partnership would what partners did with excess cash distributed on refinancing matter? | |
Mtmckeecpa (talk|edits) said: | 8 April 2006 |
| I dont' think it matters under Dennis' senario UNLESS the cash distributed can't be alloated entirely to operating expenses, capital improvements, and distributions...this is an example from PPC, 29B-4.
I've always taken the position that a refi on a rental, where the client pulls out cash, they must be able to trace the use, otherwise, more than likely it is personal and nondeductible. In this question, above, I would NOT deduct on Schedule E or Schedule A. In my opinion, the interest is nondeductible personal interest. | |
| 8 April 2006 | |
| Have to agree with MTM after that one.
I had a client who refinanced her home to pull money out to buy a new primary home, THEN converted the original home to a rental. I think in my scenario the interest tracing rules are a mute point, she gets to deduct all the interest on the first as rental, by using the home equity interest deduction rules. | |
