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Discussion Forum Index --> Tax Questions --> Is mortgage interest deductible on a rental home? generally speaking
Will (talk|edits) said:
| 17 February 2007
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| If acquisition or improvement debt it is deductible against rents received.
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JR1 (talk|edits) said:
| February 17, 2007
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| Here's a trap that I've been caught in I think, and I bring it up so that we can all be reminded. In the rental universe, the common thinking is to hold properties and refi them every 10 years or so, pocketing tax free money and letting the tenants continue to effectively make your mortgage payments. But, that new mortgage debt, if it exceeds the original acquisition debt amount, isn't deductible? Or if it exceeds the acq debt that it's replacing? And if it's not deductible, what happens to it? Does it roll forward? Anyone with experience in this?
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Glmpllc (talk|edits) said:
| 17 February 2007
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| Interest tracing rules apply...to the extent it's used to pay down the principle balance of acquisition debt it's deductible...after that it depends on how the funds are used.
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JR1 (talk|edits) said:
| February 17, 2007
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| So if the money is used to just take out personally and bears no relationship to the property any longer...it's not deductible. What does happen to it? Forgive me if this is standard stuff I should know...never was concerned about it as long at the property was attached to the mortgage, and then somethign someone said a while back gave me one of those butterflies loose in the gut feelings...
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Will (talk|edits) said:
| 17 February 2007
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| I think it was Michealstar that first pointed this tracing rule to me. I believe the interest on debt in excess is treated as non-deductible personal interest. But of course I have never seen this in practice, people just deduct the interest they are paying...
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Mtmckeecpa (talk|edits) said:
| 17 February 2007
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| Agree...tracing rules apply, if not used for business, investment, passive, education and whatever other interest categories there are...personal and non-deductible.
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Death&Taxes (talk|edits) said:
| 17 February 2007
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| So is it a good deal to pull the equity out of the property? You get your money, but pay your tax bracket on the interest you cannot deduct, and get nothing for this volunteerism when you sell. Sounds like a bad deal to me.
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Glmpllc (talk|edits) said:
| 17 February 2007
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| If used to fund personal expenses, it personal interest...if used to fund operating expenses, it's related to the rental activity...have to analyze where borrowed funds went...if deposited into an account then borrowed funds are treated as the first funds expended...best advice to clients is to never commingle debt proceeds and personal or non-borrowed fund...See Reg. 1.163-8T.
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Glmpllc (talk|edits) said:
| 17 February 2007
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| D&T, it may still be a good idea to pull out equity...just segregate it in a separate account and use it to fund operating expenses.
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JR1 (talk|edits) said:
| February 17, 2007
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Yep, definitely went to fund operating expense.  
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Death&Taxes (talk|edits) said:
| 17 February 2007
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| Or invest it. Usually by the time there is real equity, the property rents cover most everything. I wonder if anyone has had the experience of IRS doing interest tracing. I never have.
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JR1 (talk|edits) said:
| February 17, 2007
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| Me neither...and that guy that I'm thinking about was audited for mortgage interest. The total on all his properties didn't match IRS' computers, so we got to visit the office and 'splain. Multiple vehicles w/o logs, refi's, etc.....no change. That's been ten years ago maybe. I told him to never tell anyone that he got a no change. Unbelievable.
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Death&Taxes (talk|edits) said:
| 17 February 2007
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| But every year those guys giving seminars, like our estimable Kevin, tell us IRS will be cracking down in this area.
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Glmpllc (talk|edits) said:
| 17 February 2007
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Using the interest tracing rules to your advantage is definitely not  , rather it's sound tax planning. The fact that operating cash flow covers expenses does not affect interest tracing. You are left with greater cash flow, which effectively gives you the proceeds from the debt over time, rather than a lump sum.
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, rather it's sound tax planning. The fact that operating cash flow covers expenses does not affect interest tracing. You are left with greater cash flow, which effectively gives you the proceeds from the debt over time, rather than a lump sum.
