If I have say 300K loan outstanding on my primary home and take 600K cash out refinance (300K paid off for old loan), can the 300K be used to pay off my property rental loan and interest on 300K be still claimed against rental income?
You could. However, when you get your 1098 Mortgage Interest Statement for the 600K loan, you will need to calculate the % of interest that belongs to the Rental Property portion of the loan to enter as a Rental Expense (or let TurboTax calculate).
When you enter the 1098 in the Mortgage Interest section as a personal deduction, you will need to indicate 'the amount of interest I entered is not what's shown on my Form 1098'.
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Doesn't seem like it is % based calculation. IRS publication 936 under "mixed-use mortgages" clearly states that Home acquisition debt starts to get paid off only after HELOC portion is paid off. As in, first the principal is adjusted towards HELOC portion and till the time HELOC portion reaches 0, home acquisition debt remains as is.
that is correct; the 'acquisition' debt is 'stuck' at $300,000 until the mortgage amortizes down to $300,000
Suggest taking the 12 point average of the mortgage for the year. $300,000 / mortgage average is the percent of interest that is tax deductible on schedule A; the rest is deductible on Schedule C/E.
Note that if you later sell the rental property and do not but another rental property, and the mortgage balance is above $300,000, the interest related to the portion above $300,000 is NOT tax deductible
It is clear that if I use entire HELOC portion for buying a new rental I can claim the interest on that 300K against rental income from that property. Is that the case even if I use entire 300K of HELOC to pay off the mortgage that I already have on rental property?
Does turbo tax takes care of the part that home acquisition debt is not reduced till HELOC is paid off? If my interest rate is 10% and home acquisition debt is 300K, my mortgage interest is 30K for that year. Did I get that right?
If mortgage interest is 30K, then whatever interest I have on 1098 - (minus) 30K is interest on HELOC. Did I get that right?
It is clear that if I use entire HELOC portion for buying a new rental I can claim the interest on that 300K against rental income from that property. Is that the case even if I use entire 300K of HELOC to pay off the mortgage that I already have on rental property? My understanding is that this strategy works.
If my interest rate is 10% and home acquisition debt is 300K, my mortgage interest is 30K for that year. Did I get that right? Yes. If mortgage interest is 30K, then whatever interest I have on 1098 - (minus) 30K is interest on HELOC. Yes
and just so terms are in synch. You borrowed $600,000. the IRS doesn't care whether that is called a HELOC or Cash out refi, Heloan or whatever term your bank used. What the IRS cares about is how much 'acquisition' debt was outstanding on your personal home at the time of this mortgage transaction. Whatever that balance was (assuming you had not cashed out before which makes this conversation trickier) is the 'acquisition debt' and the interest on that balance is tax deductible on Schedule A. The rest IS NOT deductible on Schedule A. For it to be deductible you'd have to invest it in a rental property or business where it could be deducted on the appropriate schedule. If you took the money and used it to purchase (or pay off a mortgage) on a vacation / 2nd home, it would not be deductible since it would have to go on Schedule A and 'the rest is not deductible on Schedule A"
Thanks for confirming that Bank's name for the loan doesn't matter. So let me rephrase using exact IRS terms.
Say that my current loan is 300K and whole of that is home acquisition debt (HAD for short). Say I now refinance and take a Lon of 600K, 300K being by HAD and rest 300K isn't HAD (I don't use it for home improvement etc). Let me call this HELOC portion of the debt.
1. It is clear to me that if I use HELOC portion for buying a rental, interest on the rental income can be set off against the rental income. Can the interest be set off even if I use 300K to pay off the existing loan on the rental property?
2. HAD of 300K remains at 300K till HELOC portion of 300K is paid off. Let's say it takes about 20 years for HELOC portion to get paid off. So, for next 20 years my HAD remains at 300K. Question is what's the mortgage interest on primary residence in Schedule A? is it 300K * 10% ( 10% being my loan interest rate) for next 20 years?
Thanks, this Q&A was very helpful and I basically refi'd last year following this scenario but the details are hanging me up. The total loan was almost 10k more than the prior loan payoff costs of the 2 properties because of all the closing costs that got rolled into the loan, so do i split the closing costs between the 2 properties or lump it in with the HAD (primary)? Using the $300k HAD and HELOC examples referenced in the original post, my total new loan would be $610,000 not $600k. So does the HAD deduction become $310k * interest rate until the HELOC portion ($300k, initially) is paid off or do you split closing costs proportionally as if you owe $305k on HAD (primary) and $305k on the HELOC (rental).
Can Turbotax help with the HELOC interest calculation?
Yes, you should split the closing costs between the two properties using the information below..
Take the total cost of both properties then divide each by the combined total of both properties to arrive at a percentage of each property. Use this percentage times the total of closing costs to arrive at the correct amount for each property. This assumes they were not broken down by property on the settlement statements.
If you are unsure of cost of each property, use the County Tax Assessments to arrive at a value of each, then use the same formula to arrive at the percentage of each property.
Once this is completed you can use the 'cash out' amount that was used for the rental property as mortgage interest on the rental. The remainder will be home mortgage interest.
Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt. TurboTax will calculate the amount of allowed mortgage interest deduction based on your entry or you can choose to make the entries yourself.
- To review the information and worksheets you can use this link: IRS Publication 936, page 12 (you can make the appropriate entries by selecting 'I'll enter it myself'
- See the image below for the questions that must be answered for TurboTax to calculate correctly.
Here are my closing costs. As I go over these I can't help but wonder if some of these like the appraisal fee, Homeowner's Insurance, Property tax (on Primary) and Title fees shouldn't be assigned only to the primary residence cost basis since they are specific to that property. Should I just consider them part of the necessary costs of securing a loan and split them proportionally to the payoff amounts?
|P.O.C. (Payed outside of Closing)||Debit||Credit|
|Primary Home Mortgage Payoff to Loan Company A||$271,551.01|
|New combo Loan||$422,000.00|
|0.2150% of Loan Amount (Points)||$907.30|
|Admin Fee to Mortgage company||$995.00|
|Prepaid Interest (remainder of closing month)||$312.16|
|Homeowner's insurance 13 months||$749.45|
|mortgage processing fee||$695.00|
|Lender Premium Tax to Title Co.||$64.80|
|Settlement or closing fee to Title Co.||$577.50|
|Reconveyance Tracking Service Fee to Title Co.||$44.00|
|Government Recording and Transfer Charges - Mortgage||$131.00|
|Unsecured Debt Paydown to Rental Property Loan Company B||$140,965.20|
|Due to Borrower||$2,000.00|
If I do just split all the closing costs proportionally to the property payoff amounts I get the numbers below:
|New Loan total||$422,000.00|
|minus Primary payoff||$271,551.01|
|minus rental payoff||$140,965.20|
|Total Cost of both Payoffs =||$412,516.21|
|Rental divided by Total Cost||-$140,965.20 / $412,516.21=||0.34172|
|Primary divided by Total Cost||-$271,551,01 / $412,516.21=||0.65828|
|Primary Closing Costs||Rental closing Costs|
|$9483.79 x 0.34172||$3,240.80|
|$9483.79 x 0.65828||$6,242.99|
|Primary Portion of loan (Payoff + 65.828% of closing costs)||$277,794.00|
|Rental Portion of loan (Payoff + 34.172% of closing costs)||$144,206.00|
$277,794.00 is what I think I should plug in for the Turbotax question: "Since you first took out the loan, how much has been spent to buy, improve or build the home it's secured by?"
Does that seem right?
Property tax, insurance premium etc are not really closing tax when it comes to your tax returns. These are recurring expenses and you are paying it to an escrow because that's what you and bank have agreed for. These are expenses you incur yearly for your primary home. Property tax may be tax deductible but insurance premium is not.
Title insurance, and other costs too (I think) are part of cost for the primary home. I feel only the points you paid is perhaps can be and needs to be split.
I started going down the road of looking up which of these costs are deductible or not but then thought does that matter, is deductability really the question at hand? It was a no-closing cost loan so all those items got rolled into the total loan amount, which my 1098 confirms is $422,000.00, I will be paying interest on that total, so shouldn't it just be a question of how I properly divide that interest deduction between the two properties?
Or should I track 3 categories of interest, 1st for the Primary property portion of the principle balance, 2nd for the Rental portion , and 3rd all the remaining non-deductible portions of the loan including: the $2000 due to the borrower, 13 mo. Homeowner's Insurance, 4 mo. property tax, and appraisal fees?
I guess that third, non deductible, category would also apply to anyone who does a cash out refinance for pulling out cash for purposes not connected to a property (e.g, new car, debt paydown etc.)
You are correct, 3 parts for the win. You need to have the established paper trail for the rental house.
**Mark the post that answers your question by clicking on "Mark as Best Answer"