Cash-out refinance on primary residence to buy a rental property

[Chris2]

I am sooo excited to hear from you!!

My confusion is the 1098 of my primary house has the primary's address and information. It doesn't mention anything about the rental house I purchased using the cash-out money. Should I just disregard the different information and just add another 1098 interest to my rental house?

Again, the 1098 is for my primary house. I know I used the money to buy the rental house. I am not sure how to handle it since this is the first year in my tax return.

Chris

[Chris2]

Other than interest, can I deduct 40% real estate taxes in the rental house Sch E as well?

Thank you Carl!!

Chris

[Carl]

can I deduct 40% real estate taxes

 Is there some reason I'm not aware of, as to why you can't claim all of the RE taxes on the property? Maybe it's because you're only renting out 40% of the property?

[Chris2]

I cashed out my Primary Residence and bought a rental house last year. Now I received a 1098 for my primary residence. Since I believe 60% of the interest is for my primary home so 60% should go to SCH A while the 40% should go to the rental house's SCH E. I am not sure how to handle it using TurboTax 2022, and not sure if I can claim 40% of RE taxes of my primary residence to the rental house's SCH E as well. 

[JulieS · Accepted solution]

No, you can't claim 40% of your primary home's real estate tax as a rental expense. 

As was covered in prior posts, you can enter 40% of your mortgage interest, since that money was used to buy the rental.

You claim your rental unit's real estate tax as a rental expense and you claim your home's real estate tax as a personal deduction on Schedule A. 

[Chris2]

Hi Julie,

I am not sure how TurboTax 2022 handles this split. Should I just manually calculate 40% of my primary's 1098, and add the amount to my rental house interest expense? I just worry that the 1098 is under my primary address, how does the IRS know the story behind it that I cash out and used the money to buy a rental?

[KrisD15]

You can manually enter the amount of interest which is for the personal residence and the amount as a rental expense. 

The TurboTax worksheets do the same thing and worksheets are not part of your federal 1040.

If you paid points, I would allocate that entirely to the rental if all the cash-out was used for the rental. 

The IRS does get copies of 1098 Forms, so if they were to audit, they would see that you allocated from the Form 1098 which was issued to you. 

[Chris2]

Wish I can send you a private message like we did Carl.

I cashed out my Primary Residence and bought a rental house last year. Now I received 1098 for my primary residence. Since I believe 60% of the interest is for my primary home so 60% should go to SCH A while the 40% should go to the rental house's SCH E. I am not sure how to handle it using TurboTax 2022, and not sure if I can claim 40% of RE taxes of my primary residence to the rental house's SCH E as well. 

I am not sure how TurboTax 2022 handles this split. Does it have an automatic way to calculate and assign the interest to the rental for me? Or should I just manually calculate 40% of my primary's 1098, and add the amount to my rental house interest expense? I just worry that 1098 is under my primary address, how does the IRS know the story behind it that I cash out and used the money to buy a rental? Based on other experts, it looks like I have to do it manually. 

[Carl]

I am not sure how TurboTax 2022 handles this split.

The TTX program does not do any splits for this scenario. It's up to you to manually do it.

Only the percentage of the mortgage interest that applies to the rental can be claimed on the SCH E.

NOTHING ELSE is split. 100% of the property taxes paid on your primary residence is a SCH A itemized deduction. Not a penny of it, or anything else related to your primary residence is reported on the SCH E.

[Chris2]

Thank you very much!