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Boo2
New Member

Should I take a loan against my paid off rental property to benefit filing taxes from the income collected from renting it out?

I currently have a mortgage on my residence and I'm not working, so I use that rental income to help pay my mortgage. or should I take a loan out on the rental property and pay off my current residential home?

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Accepted Solutions
view2
New Member

Should I take a loan against my paid off rental property to benefit filing taxes from the income collected from renting it out?

You lose a rental interest  deduction , If the LOC was used for personal purposes, it is not deductible against rental income.

 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Chapter 4 of Pub. 535 explains mortgage interest in detail.

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3 Replies
Boo2
New Member

Should I take a loan against my paid off rental property to benefit filing taxes from the income collected from renting it out?

Thank you for your reply but I am still confused.  The rental property doesn't have an outstanding balance which mean I won't be getting any interest deducted right now.  So, should I take a loan against it now to create the mortgage to have a write off.

I took a loan against  my current residence 3 years ago to acquire the property and now I'm paying for the rental property with my current residence.  So the rental property is paid off but I'm paying more mortgage on my residence.  I would like to pay off my current resident and have the Lien again the rental property.  Does that make sense to do?  I believe I will benefit more am I right?
view2
New Member

Should I take a loan against my paid off rental property to benefit filing taxes from the income collected from renting it out?

Your welcome , passive activtity rules are different than home mortgage rules.

(h) Disallowance of deduction for personal interest
(1) In general

In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.

<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/163">https://www.law.cornell.edu/uscode/text/26/163</a>

"The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds.

Secured loan.   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan."

Example.

'You secure a loan with property used in your business. You use the loan proceeds to buy an automobile for personal use. You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property.'


"Allocation of Interest"

"The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds."

"Interest You Can Deduct'

You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Interest"relates to your trade or business" if you use the proceeds of the loan for a trade or business expense.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p535/ch04.html">https://www.irs.gov/publications/p535/ch04.html</a>

The  Regulations  under  Internal Revenue Code  (“IRC”) Section  1.163-8T  define  the  method  for
allocating interest in order to apply the appropriate deduction limitations for passive activity interest,
investment interest and personal interest and are commonly referred to as the “interest tracing rules”
view2
New Member

Should I take a loan against my paid off rental property to benefit filing taxes from the income collected from renting it out?

You lose a rental interest  deduction , If the LOC was used for personal purposes, it is not deductible against rental income.

 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Chapter 4 of Pub. 535 explains mortgage interest in detail.

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