Cash out refinance on primary home to pay off loan on rental property. How do I record the split mortgage interest in TurboTax?

[tandemstoker]

I want to deduct the cash out/HELOC portion of the interest from my rental income. How and where in TT do I do that? Do I enter the 1098 under the rental even though it belongs to my primary residence? Do I note it as a different expense? I have calculated the percentage and dollar amount of interest for each loan. My understanding is that the home acquisition debt starts to get paid off only after HELOC portion is paid off. How do I get the correct amounts recorded in TT for the primary home? The home mortgage interest deduction screens don't take into account this scenario. Thanks for any help.

[RaifH]

Generally, you are correct that home equity debt is paid off before home acquisition debt. However, in your case, since you are using the home equity debt as a rental expense, the IRS actually allows the reverse, for the home acquisition debt to be paid off first. This should be beneficial since a rental expense often is of better use than an itemized deduction. 

You can divide this mortgage up between the portion that is considered home acquisition debt and the portion that is home equity debt that you used to purchase your rental property. To do it in TurboTax, start with your personal deduction for the home acquisition debt:

1. Enter your Form 1098 as a personal deduction in Federal > Deductions & Credits > Your Home > Mortgage Interest & Refinancing
2. Enter only the portion of the interest that was home acquisition debt. If your refinance was for $700,000 and you used $200,000 on the rental, enter 5/7 of the interest. The next year if your outstanding mortgage principal is $680,000, your rental interest would still be $200,000 but your personal interest deduction would be for the interest on $480,000. 
3. Select the box that says The interest amount I entered is different than what's on my 1098. You will attach an explanation statement that states the remainder of the interest was allocated to your rental property.
4. Report the outstanding mortgage principal only as the portion that pertains to the home acquisition debt.
5. After a few screens, answer No to Is this the original loan used to buy the property? in Let's get some details about this loan
6. Answer Yes to Is this loan a HELOC or refinance?
7. Answer No to Did you take cash out? You are only reporting the home acquisition debt here.

You will report the rental interest as a rental expense.

1. Select Start/Revisit next to Federal > Wages & Income > Rentals, Royalties, and Farm > Rental Properties and Royalties (Sch E)
2. Report it as Other Interest.

[tandemstoker]

Thank you for a very helpful answer, especially the IRS link, #4 &#7 on the home mortgage and where to report the rental interest. You answered all my questions perfectly.

Regarding the loan fees & points, I can take the same rental usage percent and list it as an asset that is amortized over the life of the loan. Correct? Thanks again.

[RaifH]

Yes, you can amortize the points and fees allocable to the rental as a rental expense. The remainder of the points may be amortized as an itemized deduction. Be sure not to include the points reported in the rental section as a personal deduction:

1. Select Start/Revisit next to Federal > Wages & Income > Rentals, Royalties, and Farm > Rental Properties and Royalties (Sch E)
2. Select Edit next to your property
3. Select Add expense or asset
4. Select Improvements, furnishings, and other assets and click Start
5. select Add an asset
6. Select Intangibles, Other property
7. Select Amortizable intangibles
8. Enter Refinancing Fees as the description and the rest of the information. Select Code 163 and the length of the mortgage as the useful life of the asset
9. TurboTax will automatically deduct these over the life of the loan

Thank you, I'm glad I was able to help.