We refinanced our principle residence and a rental property into one mortgage to improve cash flow. How can we split the mortgage interest between the properties?

[db9146]

Each property had a mortgage before the refi to combine.  Can I split the interest from the now single mortgage based on these percentages?

[PatriciaV · Accepted solution]

Yes, you may allocate the mortgage interest using any reasonable method. Most taxpayers use the adjusted basis to calculate the allocation. Or you may use the appraised value required for the refinancing.

In short, the adjusted basis of your home divided by the total adjusted basis for both properties results in a percentage. Multiply the total interest by this percentage to allocate the interest reported for your home. The remainder is the interest for the rental property. See this post for an example of allocation calculations: How do I allocate the cost of my property?

Be sure you keep good records, especially if you sell one property but not the other in the future.