turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

I'm very confused with what I'm reading.   In 2016, we refinanced our primary home for $200K, in order to take a Cash out of $144K that was used to invest in another property (a rental property).   It would seem that all of our mortgage interest is deductible based on what I'm seeing in publication 936 (in 2018 and earlier years), but TurboTax does not ask whether we used that cash for investment purposes, it just excludes it from deduction.

 

Can someone who knows definitively please advise here?    Thank you!!

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

1 Best answer

Accepted Solutions
Hal_Al
Level 15

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

No; it is not deductible as mortgage interest on Schedule A.   Under the new law, you can  only deduct interest on loans used to purchase, build or substantially renovate your home.

 

But, you can deduct the interest on the $144,000 (not the full $200K) on Schedule E (rental expenses), as interest expense, even though it is not  a mortgage on the rental property. Reference: https://finance.zacks.com/deduct-interest-equity-line-investment-property-8342.html

 

In TurboTax do not enter the interest  in the itemized deductions section.  Instead, enter it in the rental section.

View solution in original post

6 Replies
Hal_Al
Level 15

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

No; it is not deductible as mortgage interest on Schedule A.   Under the new law, you can  only deduct interest on loans used to purchase, build or substantially renovate your home.

 

But, you can deduct the interest on the $144,000 (not the full $200K) on Schedule E (rental expenses), as interest expense, even though it is not  a mortgage on the rental property. Reference: https://finance.zacks.com/deduct-interest-equity-line-investment-property-8342.html

 

In TurboTax do not enter the interest  in the itemized deductions section.  Instead, enter it in the rental section.

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

Oh my gosh - that makes PERFECT sense - thank you!!   So - I'm guessing this is the way we should have done it even before 2018, right?   

Hal_Al
Level 15

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

Before 2018, the interest on the  other $56,000 (200K-144K=56K) would have been deductible on Schedule A.

 

 

Anonymous
Not applicable

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

for 2016 ans 2017 (from 2016 PUBL 936)

 

Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt.

 

Home Equity Debt
If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Home equity debt is a mortgage you took out after October 13, 1987, that does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home.

Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:
$100,000 ($50,000 if married filing separately), or
The total of the home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and
grandfathered debt for the home on the date that the last debt was secured by the
home.
Example.

Example. You own one home that you bought in 2002. Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000.  You take out a $42,500 home
mortgage loan. Your home equity debt is limited to $15,000.
This is the smaller of:
$100,000, the maximum limit, or
$15,000, the amount that the FMV of
$110,000 exceeds the amount of home acquisition debt of $95,000.
Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes,
the interest may be deductible.

 

thus for 2016 and 2017 if you had excess debt, the interest should have been deducted on schedule E not A. 

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

OK - I have now printed out the amended 2016 and 2017 returns (will have to wait for 2018 because I'm going to have to amend that *again*) - I did 2017 first and then 2016 (I still have all the TurboTax years installed).  It dawned on me though - because I'm now adding more Expenses on Schedule E (the part of the Mortgage Interest that didn't go on Sched A) that the amount TurboTax keeps track of as my (rather large) loss amount doesn't get augmented, because it's done in the past.    How do I "fix" that?   I will have to redo 2018 - and would like to make sure I have the right loss carry in values to 2018 when I do that - so that 2019 will be right?  (or hoping anyway)...  I sure hope this makes sense.    Thanks!

Hal_Al
Level 15

Is Mortgage interest deductible on a cash out if the cash was used to purchase rental property?

You may want to ask a fresh question, in the "Get Your taxes Done" section.

 

I'm not that familiar with that part of the program. But, I think I would manually change that number on the 2018 carry over work sheet. That should carry the new number(s) to 2019.  I believe you'll also get a chance to change it in the 2019 software.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies