Hi Carl -
Thanks for the response. The limitations I'm stuck on are not the SALT limits, but rather the portion of interest and points that I can allocate to the rental property.
When I enter the interest under the rental expenses section and the points under the assets/depreciation section, there is no equivalent portion in the forms for adjusting these amounts like there is on the home mortgage interest worksheet for schedule A.
To clarify a few points:
The current rental property is in Montana and was purchased as our primary residence in 2009. We moved to Florida and bought a new home as our primary residence in 2017. The down payment for the FL home came from the $80k cashed out of our MT home. The loan balance just prior to refinancing was $160k. At the time of refinance, the MT home was converted to a second home. At the beginning of 2019 we converted it to 100% rental use.
Per IRS Pub 936, I do not believe we can include interest or points associated with the $80k cashed out at the last refinance on either schedule A or schedule E because the funds were used to buy a home not secured by that loan. From what I gather elsewhere, it seems this is considered a personal loan and therefore none of the interest or points associated with the $80k are deductible. Please let me know if you disagree with my interpretation.
From pub 936:
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substan-
tially improve the taxpayer’s home that secures the loan. As under prior law, the loan must be secured by the taxpayer’s main home or second home (qualified residence), not exceed the cost of the home, and meet other requirements."
Regarding basis, the current value is certainly higher than our original purchase price. However, there is some prior depreciation that needs to be factored in because it was partially rented for several months in the past (2010-2011 timeframe) before being converted back to 100% personal use. There was also a 1st time home buyer credit that I believe reduces the basis. My assumption is the land value does not change from its original value for basis calculations.
Back to the original question though...
In order to enter the proper reduced amount of mortgage interest on schedule E and reduced amortization of points on form 4562, how do I make that happen? Is there a form that will spit that out for me, or does this become a manual calculation. Do I need to enter it as if it were a personal residence on schedule A instead and then somehow transfer it to schedule E?
