As you can see from reading the temporary regulation, there are many facets to these rules, and your facts are limited.
Based on the limited facts:
- The general rule of the regulation (c) is that the interest expense is allocated based on how the debt proceeds are used.
- In your example (the original facts of 75/25), it appears that the interest expense should be allocated in this proportion.
- This same regulation (d) provides the rules when there is debt repayment "If, at the time any portion of a debt is repaid, such debt is allocated to more than one expenditure, the debt is treated for purposes of this section as repaid in the following order:..."
- The debt repayment is allocated to the personal expenditures first. I would argue that the residence is a personal expenditure.
- As a result, you would need to reduce the principal of the apportioned debt related to the residence.
- This appears to be taxpayer favorable.
- Based on the above, you would then need to update your interest allocation percentage after reducing the personal debt component. Once again based on the original facts (75/25), and assuming no principal reductions before this, the revised personal debt component would be $720,000 (original 750,000 less the 30,000 principal repayment).
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
