@prash wrote:
My question was around the interest expense being an eligible deduction against rental income, when the interest is accured on a loan, which is obtained after buying the property in cash. Basically, loans are of different types. If delayed financing comes under acquistion bucket loan (for investment property), then it should behave fine. Otherwise, I think we can't use the interest expense as tax deduction.
I would say No, you can't deduct the interest as a rental expense.
I don't believe pub 936 and the definition of acquisition debt for a home mortgage apply here, since this is a commercial property. Instead, I am thinking about the tracing rules and the business purpose of the debt.
For example:
1. Suppose you use a credit card or personal loan to buy property B. That interest would be a deductible business expense, as long as you can meet the tracing rules (you can show that the specific debt is directly tied to a specific business purpose) even though the loan is not secured by property B. If you started adding other purchases to that credit card or loan, you muddy the water and eventually lose the ability to trace the debt to the business purpose and would lose the deduction.
2. Suppose you own property A, and you borrow against property A to buy property B, and both are commercial property (rental, business, but not your personal residences.). The interest expense can be deducted as a business expense of property B, even though the loan is not secured by property B, as long as you can meet the tracing rules.
3. Suppose you buy property B with cash, then take out a loan against property B to finance some property improvements. That's a deductible business expense against property B because you can directly relate the debt to a business purpose for property B.
4. Suppose you buy property B with cash, then take out a loan against property B to buy some stocks and bonds. The interest would be a deductible investment expense against your investment income, assuming you can meet the tracing rules, and the ability to deduct investment expenses is somewhat restricted since the 2018 tax reform (but is still available in some situations). But the interest would not be a deduction against the rent from property B,
Now, what you want to do if I understand is use cash to buy property B, then take out a loan against property B to pay yourself back, to pay back your cash account. There's no business purpose to the debt, so the interest is not deductible against the income from property B. Even though you end up in the roughly the same financial situation as if you had used your cash account as collateral to secure a mortgage on property B.
