Hello -
I'm looking for guidance on how/where to enter limitations on mortgage interest deductions and amortized points related to a cash-out refinance which occurred a few years prior to converting a property from personal use to a residential rental.
The property in question was originally purchased as our primary home in 2009 and refinanced 3 times, most recently in 2017 when it was converted to a second home. We took cash out on the last round for a down payment on our new primary home. Per recent rule changes, my understanding was/is that the cash out portion is treated as a personal loan since the new main home we bought with it is not secured by the debt. For that reason, only about 2/3 of the mortgage interest is deductible now and the discount points we paid at closing were amortized over the life of the loan and also scaled accordingly. Last year, we converted the property to rental use (put in service on January 1, 2019) and no longer have any personal use (rented all year).
For the sake of argument, the adjusted basis of the property is approximately $250K, the loan balance prior to the most recent refinancing was approximately $160K, and roughly $80K was cashed out.
For personal use properties (i.e. main home or second home) the limitations for these deductions were handled on the worksheets with schedule A, but I'm failing to see any place to limit these values (at least automatically) for schedule E. Do I need to manually calculate the reduced interest amount and use that instead of the full amount reported on form 1098? For the points, would I just reduce the initial cost ammortized proportionally?
Any insights you have on this matter would be appreciated. Thanks!
