I refinanced my home to pay off the mortgage on my rental house. Can I deduct the interest in the expense and assets part to offset the income from the rental income?

[Carl]

Thanks. Looking at the referenced "Part II" it seems to leave things a bit grey with one interpretation. In favor of the IRS with another interpretation. It's just not clearly addressed for a loan on a paid off house (meaning it's not acquisition debt) "payoff" situation. But it does talking about debt that "may or may not be secured." I'd say go ahead and claim it on SCH E based on that. Based on tax court rulings I've read over the years, a majority of the time when things are "grey" and subject to different interpretations, the tax court finds in favor of the tax payer. Of course, that's when the IRS does a re-write and clarifies things so whatever was ruled on by the court doesn't happen again.

I seriously doubt this specific situation would get to that point. But it would be interesting to follow if it did.

[Anonymous]

the thing the taxpayer has to consider is if the IRS says "No" to the Schedule E deduction, then the taxpayer will get no deduction for the interest if the non-secured election is made.  since it's now deemed unsecured it can't be deducted on Schedule A as mortgage interest and the IRS has thrown out the Schedule E deduction.  

[Opus 17]

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@Anonymous wrote:

the thing the taxpayer has to consider is if the IRS says "No" to the Schedule E deduction, then the taxpayer will get no deduction for the interest if the non-secured election is made.  since it's now deemed unsecured it can't be deducted on Schedule A as mortgage interest and the IRS has thrown out the Schedule E deduction.  

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That's irrelevant.  Even if the loan is secured by the primary residence, it's never going to be a schedule A tax deduction because it is equity debt, not acquisition debt. 

[DaveT315]

Most of the dicussion in this thread references IRS Pub 936 which is the Pub that applies to the HOME mortgage interest deduction taken on Schedule A where the property securing the loan is the taxpayers primary residence or a second home.  The Sched A mortgage interest deduction only applies to the taxpayers personal use residence.

The scenario presented by the original poster described what can be considered a refinance of acquisition debt secured by an investment rental property.  In this instance, IRS Pub 535 is the authority that should be applied to this scenario.  This Pub clearly states that interest on the loan used to "refinance" the investment property loan is deductible in the same manner as the interest on the original investment property loan, regardless of how the collateral securing the new loan is used.  Interest tracing rules apply, and the interest on the new loan is reported on Schedule E.

[tagteam]

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@DaveT315 wrote:
 IRS Pub 535 is the authority that should be applied to this scenario. 

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IRS publications are not authoritative and many of the references to Publication 936 (in this thread and the other, parallel thread) were made with regard to deducting interest on Schedule A and the election to treat the debt on the personal use residence as not secured by that residence.