Is interest on a personal loan deductible if its used to buy a rental property

[Bill357_260]

this is an unsecured loan I got to buy a house at an auction, the house has now been repaired and is rented out

[HelenaC]

No, personal loan interest is not deductible even if it is for a rental. The loan must be secured by real property.

A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:

• Makes your ownership in a qualified property security for payment of the debt,

• Provides, in case of default, that your qualified property could satisfy the debt, and

• Is recorded or is otherwise perfected under any state or local law that applies.

In other words, your mortgage is a secured debt if you put your qualified property up as collateral to protect the interests of the lender. If you cannot pay the debt, your qualified property can then serve as payment to the lender to satisfy (pay) the debt. https://www.irs.gov/publications/p936/ar02.html#en_US_2015_publink1000229890

[thj3]

I don't believe this is true.  The above IRS citation is for home mortgages not rental properties.  I haven't seen anything from the IRS that says you can't deduct interest on unsecured loans.  Can you provide a more specific citation?  Thanks

[TaxGuyBill]

@thj3   You are correct, there is no requirement that the loan be secured by the rental property.  So yes, the loan interest would be deductible as a rental expense.

[Ryan100001]

Just doubling checking this question.
If I take out a loan, from my investment bank, secured again my brokerage assets and NOT the rental property itself, is the loan interest deductible on the rental property schedule E?
(note the loan will be used to pay off the current mortgage)

The loan interest, since not a mortgage, will only be reported on my brokerage/bank statement and NOT on a 1098 or equivalent. Any issues?

[Carl]

From my interpretation of IRS Publication 535 Chapter 4 (https://www.irs.gov/pub/irs-pdf/p535.pdf) that portion of the loan used for business purposes can be treated as business use. The publication covers both passive and non-passive investment use. (passive applies to rental property) However, tracing rules apply in order for the interest on those funds used for the rental property to be deductible on the SCH E.

[Ryan100001]

Carl

very good, thank you.

I’m not familiar with “tracing requirements”; can you elaborate or point me to a resource?
thanks!,

[investng engineer]

It means that you have to keep records (bank statements, invoice, etc.) that show that the loan proceeds were used to improve the property and that your deduction amount is the same as the interest from the loan.

Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or tax advice.