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'.
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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?