Discussion:Refinancing home but using funds for rental purchase
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Discussion Forum Index --> Tax Questions --> Refinancing home but using funds for rental purchase
NorthernEA (talk|edits) said: | 4 March 2006 |
| I have a client who refinanced his home and used the proceeds to purchase rental units. Where do I report the mortgage interest - Schedule A or Schedule E? If I use Schedule A, then the $100,000 rules apply and I won't be able to take it all anyway. If I take it on Schedule E, then I think I have to elect to treat the debt as unsecured debt. Has anyone had this circumstance and how did you handle it? Thank you. | |
| 4 March 2006 | |
| It's not unsecured, merely not secured by the underlying rentals. Frankly, I'd show it on the Sch. E as unqualified mortgage interest, and reference it on A so that IRS can track it. Is it subject to the 100k rules? Hmmm. It might be, that would take some research. | |
| 5 March 2006 | |
| Each year you will have to allocate the mortgage interest paid on the combined mortgage between the primary residence and the rental units.
I hate when clients do this! It's so much easier when they keep personal and business separated! | |
| 5 March 2006 | |
| Sch A as the home that secures the loan is the primary residence, not the rental. 100k rule. He should have obtained loans on the rentals instead of his own home. | |
| 5 March 2006 | |
| The rental is paying part of the mortgage payment therefore is eligible for the allocation of the interest. The refinance was to purchase the rental so the allocation goes also to the portion of the refi (principal, etc) that went to purchase the new mortgage. The mortgage is now for both properties. If anything, asap, he should obtain a separate mortgage for the rental. | |
| 6 March 2006 | |
| NothernEA, the rules are very simple. Assuming that this was the first refinance of the client's personal residence, the interest on the home acquisition debt (as defined in Sec. 163) and the first $100,000 of home equity debt (as defined in Sec. 163) is deducted on Sch. A. The balance is deducted on Sch. E.
Alternatively, your client can make an election to treat the debt as being not secured by the residence; then, the tracing rules would be applied and a portion would be deducted on Sch. E and a portion would be nondeductible (the portion attributable to the payoff on the original mortgage). | |
Sierrafc.com (talk|edits) said: | 6 March 2006 |
| I agree with Riley2 except that you should allocate the appropriate amount of interest to the investment property on Form E, not necesarily take the first $100,000 on Schedule A, although you have the option to deduct HELOC interest on Sch A no matter what you spend the money on.
It would simplify things to have a separate loan. | |
| 6 March 2006 | |
| Sorry, it doesn't work that way unless you have made an election to treat the debt as being not secured by the qualified residence (probably not a beneficial election in this case). | |
NorthernEA (talk|edits) said: | 6 March 2006 |
| Clients never simplify things, do they? Thanks for all of the above discussion. This client did consult with me prior to doing this and I advised against it - said to get a loan on the rentals. However, my clients said the interest rates would be too high to get a loan on the rental property, so they were talked into refinancing their primary residence and taking the equity to purchase and repair the rentals. I agree that treating this debt as unsecured would not be wise in this case. I have split the interest between Sch A and E as appropriate and according to the 100k rules. | |
| 7 March 2006 | |
| Your client did the right thing. They obtained a lower interest rate loan. By allocating interest it is all deductible. Give the client the best advice to save the most money. Stay away from what might be easier on you at tax prep time. | |
Sierrafc.com (talk|edits) said: | 8 March 2006 |
| Riley2 - I stand corrected. I suppose a deduction on Schedule A beats no deduction ;) | |
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