Mortgage interest deduction - schedule E

[khopper]

Schedule E – Rental Property Mortgage Interest.  Can I put Mortgage Interest from a loan secured by my primary home on a Sched E for a different (rental) property, if the purpose of the loan was to buy the rental property?

January, 2015 – Purchase of Vacation Rental Property (Property B).  Borrowed $162,000 on a Chase HELOC, secured by my primary residence (Property A) for this purpose.  There was no other mortgage on the residence – Property A – at the time.

April, 2015 – We replaced the Chase HELOC with a primary mortgage on our home – property A - borrowing $162,000.  That mortgage was quickly transferred by the bank to Wells Fargo.

2015-16-17 – Used the Mortgage Interest Deduction in its entirety on our Sched A, and did not include any interest deduction on the Sched E for the rental property.  2018 - IRS changed mortgage interest rules.

Can I now apply that mortgage interest to my Rental Property – Property B - Sched E for 2020, since the intent of the loan was to pay for the rental property?

[AmyC · Accepted solution]

Yes, you can deduct the interest on your sch E. Be very careful and be sure you have the paperwork that matches what you described.

Page 7 of Instructions for Schedule E line 12 states: Specific tracing rules apply for allocating debt proceeds and repayment. This is governed by Publication 535, Business Expenses which basically says to be able to prove the money trail.

The IRS is used to seeing a form 1098 with the rental property address and mortgage interest. If they ask, you need to be able to prove the money was used for the purchase of the rental. Obviously, you are not claiming it on your personal residence so you are not double dipping.

[khopper]

Awesome feedback Amy.  I've pieced together the paper trail.  More schedule E questions.  We drove down to work on the condo, 2138 miles round trip, so I plan to use the mileage auto expense and have prorated it using the same ratio as the overall personal use / days rented ratio (11 / 208), 94.7%.  For that specific trip I declared 11 personal days out of 30 days stayed, the other 19 days working on cleaning and repairs/maintenance.  Is my declaration sound, or should I use a 19/30 ratio instead or some other method.  And what about hotels, two nights, one night on the way down, one night on the way back?  And meal expenses?  And how to prorate?  The instructions don't seem very detailed.