Discussion:Creative Borrrowing

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Discussion Forum Index --> Advanced Tax Questions --> Creative Borrrowing


Discussion Forum Index --> Tax Questions --> Creative Borrrowing

Bell (talk|edits) said:

19 May 2014
Client wants to borrow 110,000 against the equity on one of their rental houses. I didn't think a lender would do this, but they are. TP did disclose the fact that this house is a rental house. The money will be used to pay off their personal-use beach house. The interest is deductible on schedule A as a second home. I am just thinking how easy this would be to take on schedule E if you didn't know what went on. Something doesn't seem right about this and wanted to run it by all of you professionals. I guess when you borrow money, it does not matter what the collateral is........just what it is "Used" for. Please keep my thinking straight. Thanks, in advance.

Mactoolsix (talk|edits) said:

20 May 2014
If the current loan on the beach house is acquisition or equity debt, it is deductible interest (as it is secured by personal use property).

The new loan taken secured by the rental property is not acquisition debt for either the rental or the beach house. It does not qualify for either acquisition debt or equity debt deduction. The interest is not deductible on Sch A, Sch E or any other schedule.

Loan funds must be allocated by the use of the funds (follow the money), and for property deductions must be acquisition or equity (on personal use property) debt.

Wiles (talk|edits) said:

20 May 2014
I am just thinking how easy this would be to take on schedule E if you didn't know what went on.

Exactly! This is another example of how the taxpayer would be better served by someone who didn't know the rules or didn't bother to ask questions.

Bell (talk|edits) said:

21 May 2014
Thank you for the good catch. I would not think the loan company would go along with this. Thanks again. It just didn't seem right.

Ckenefick (talk|edits) said:

22 May 2014
Would it be wise to pledge the primary residence as collateral also?

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