rental property

[vhornaday]

built garage apartment in 2020 used refi and private loan to pay for it both secured by property

Spoiler

part of mortgage interest was allocated in turbotax to the apartment yet turbo tax is not deducting the allocated amount from schedule A how do I fix it?

results in overstatement of interest paid. 

[ColeenD3]

Also, under the tax code, rental activity generally counts as passive activity, so if you borrowed money to buy a house to rent out, the interest isn't deductible as investment interest. But in this case, you could use the interest as an expense item for operation of the rental property on Schedule E. Passive Interest

Also, please see this LINK for more information.

[vhornaday]

confused by your response - money was taken from refinance plus a second mortgage to build a detached garage with apartment so the part of the interest expense that was used to build it should be allocated to the rental as I understand the tax code.   Turbotax ask me the questions about the number of days rented and the portion belonging to the rental activity, added the rental expense to the schedule E but did not subtract it from the mortgage interest reported on schedule A .

Are you telling me I should just report all mortage interest on ScheduleA and leave it off rental all together?

[ColeenD3]

No. The point of the initial post was that it could be deductible on Schedule E. I'm trying to cover all the bases here. In addition, if you do determine it can be used for both the rental and your primary home, you will need to do the math and manually enter appropriate amounts on Schedules A and E.

You didn't specify what the private loan was, but...

• A seller-financed mortgage can qualify for the mortgage interest deduction. (Schedule A)
• In regards to a HELOC:

           It must meet these conditions to be deductible

• The loan or line of credit must be used to buy, build or substantially improve your home. This requirement began with tax year 2018 and extends through 2025.
• You can only deduct the portion of the loan or line of credit you used to buy, build, or substantially improve the home that is used to secure the loan or line of credit. This requirement began with tax year 2018 and extends through 2025. If you’ve ever used part of this loan to pay for things other than this home, you cannot deduct the interest from that amount of the loan, even if the transaction didn’t take place this year.

Second mortgage:

Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately). Any interest paid on first or second mortgages over this amount is not tax deductible. (Schedule A)

[vhornaday]

Thanks, but for some reason, turbotax is not allowing me manually enter each portion to the proper schedules.  Just to clarify, the cost of garage totaled 150,000.  8,000 was cash out refinance of first mortgage.  This 8,000 plus 130,000  loan from relative secured by deed of trust on house plus cash out of pocket was used to build this detached garage.  I use garage space for me personally and upstairs is rented.   Based on what I understand of tax law the portion of the interest related to the rental unit should be allocated to rental unit (I calculated based on sq ft of garage 1/2 personal, 1/2 rental).      I enter the amounts in the mortgage interest section for the 1098 for first mortgage.   I did find online a posting that said to go into forms mode to key in the mortgage from my relative since I did not get a 1098 and this is not a seller financed as I already owned the property the garage was built on.  Turbotax did allow me to manually enter here in forms mode this mortgage but is not allowing me to manually adjust down the amount on Schedule A.  This seems to be a programming issue as since it asks you what portion is personal and what is tied to the rental, it should reduce the personal portion on schedule A.   I will try calling tech support.  There is bound to be a box somewhere I should have checked and did not to get it to do the math.   

[DianeW777 · Accepted solution]

In your situation the easiest thing to do for the apartment asset is to separate the cost of the building for depreciation.  This gets more complicated than a tax program can handle automatically. 

To make sure TurboTax can do the calculations to split the personal expenses, you must answer the questions in the Rental Info or Property Profile, depending on whether you use online or desktop.

1. Do NOT check the box beside "I converted this property from rental to personal use in 2020".  Instead select "I rent out a unit in a multi-unit property where I live" (even though you don't live there but use this portion for personal use and storage and all miscellaneous expenses). This will take you to the question "Yes, I will enter total amounts and let TurboTax do the math", once select the rental use percentage will appear. Enter the percentage.

1. Select Yes, this property was rented all year (this is asking for the period of the year that it became a rental regardless of the start date)

Key Points: TurboTax will prorate the personal portions of expenses that cover the entire property (mortgage interest, property tax and insurance).  The other expenses will be used at 100% assuming they are for the rental unit only.  Be sure to check your return once you complete the rental activity.

If you enter the property percentage from step 1 above, the expenses should reflect accurately in Schedule E and Schedule A. The images below are first from TurboTax Online and the second if from TurboTax Desktop.