@Carl wrote:
@Opus 17
The word "RE"finance threw me off a bit.
I had no outstanding balance on my primary residence. I refinanced my primary residence
Actually, you didn't "re"finance anthing. You financed your primary residence through the same company that held the mortgage on the rental. (Being the same company doesn't matter.)
Per IRS Publication 936:
The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes.
page 4, column 1.
https://www.irs.gov/pub/irs-pdf/p936.pdf
You'll read more there too, and see that all of the loan interest is a SCH A deduction. Seems to be "grey" on that since the loan was not used to purchase a "new" home or anything. But I'm looking at the first two columns on page 3 under Secured Debt. The debt is 100% secured by the primary residence only. The rental is not "secured" by anything because there is no debt owed on the rental.
This mortgage secured by the residence is never deductible on schedule A because it is not acquisition debt for the residence, it is equity debt and interest on equity debt is not deductible.
We are arguing that the interest expense can be a business expense using the tracing rule, even though the loan is not secured by the business property.
We may have to agree to disagree, and recommend the taxpayer discuss the situation with a qualified accountant in their area.
