interest allocation of mixed use mortgage

[u0d4n7a0p]

Thanks a lot. so, you are saying that for a new mortgage used to buy a new home, 1.163T doesn't apply at all?  Where in 587 is this stated? I am trying to understand your reasoning.

[zomboo]

@u0d4n7a0pIt's obvious I am unable to understand your situation well enough to provide information that will satisfy you. Please seek the advice of persons more qualified than myself. Good luck.

[u0d4n7a0p]

Thanks. Here is what I see.
936 says that mortgage deduction is limited to 750K (or whatever is the acquisition debt)  and you are supposed to calculate by using it as numerator over  average monthly balance and then multiplying the same with interest for that year (Assuming you had mortgage for the whole year). Whether the rest of the intrest is deductible entirely boils down to how the  rest of the interest was used. if 25% of your home was used for passive activity, then 25% of total interest is the expense for earning the income through passive activity.

We are now on to debt repayment. Personal debt (home equity debt)  is paid first followed by acquisition debt and then passive activity debt and so on. This is from "Mortgage Interest and the Tracing Regulations After the Tax" by Donna M Byrne.  

If you find anything which contradicts our current understanding or something which is very different from either of our understanding in future, please do post here.

Thanks for your time.

[zomboo]

Basically what you have stated is true but doesn't apply to you if you have a new mortgage on a home that has 25% business use. All of that information is when the loan contains different types of debt. In the case of a new mortgage you have only one type of debt: acquisition debt. All of the mortgage was use to acquire the home only, not for the business. This is fundamental for you to understand.

However, since you are allowed to deduct the ongoing home ownership expenses that apply to the business as a business cost, split the mortgage interest 75-25 and use 75% of the total interest in the calculation under Pub 936 for schedule A and 25% of the mortgage interest deduction against the business income on, I believe, schedule C.

[u0d4n7a0p]

I think you would agree with what "Mortgage Interest and the Tracing Regulations After the Tax" by Donna M Byrne is saying. IRS doesn't care for loan products - refinance, mortgage, HELOC and so on. If you see the said document and see the memo we discussed earlier, there are two things that it says:

1. Entire debt obtained by securing the property can be allocated for another purpose. At that point interest is not deductible under itemized deductions and can only be set against the the income generated by the activity to which debt is assigned. Tax payer needs to make this selection explicitly in writing and it remains effective for all the years after the selection unless commissioner agrees with the tax payer to change the allocation. 

2.  Tax payer can choose to set aside a portion of debt obtained by securing the loan for another activity and the same need not be through an explicit written request. Interest on the debt which is set aside can be deducted only from income generated by the activity to which it is assigned to.  

Your argument is that this is applicable only when the debt in question is home equity debt and is not applicable when it is home acquisition debt. Did I understand you right?

[zomboo]

I think it is fair to say that you did not understand what I said. The two bullet items you provided are meaningless out of context and I am unable to find the context in the sources you provided. I am not a tax expert and I am not trying to give tax advice. I am only providing my interpretation of the mortgage interest deduction in a effort to help you with your situation. However, at this point, I really have no idea what your situation is and I can no longer try to figure it out. I will not response further on this thread.