Posted by Diane (TX) on February 26, 2004 at 20:13:52:
Frank:
Yes, you have the right idea. Interest is traced to how the principal is used. So, if you spent 20K on the business and 80K on the partnership, you’d expense 20% of the interest in the business and 80% in the partnership.
It’s cleaner to have separate loans for separate purposes, but do the best you can.
interest deduction - Posted by Carrie
Posted by Carrie on February 22, 2004 at 17:23:37:
Is interest deduction from rental property deductible if the loan to buy the property is a home equity loan on a personal home or a personal loan with interest from a family member?
HEL interest deduction for rental - Posted by Diane (TX)
Posted by Diane (TX) on February 23, 2004 at 19:07:52:
If you do nothing, the home equity loan on your personal residence will be treated as personal mortgage interest. It will be deducted on your Schedule A as an itemized deuction. However, you can ELECT to have it treated as mortgage interest for the rental, and then you can deduct it on Schedule E.
Here’s how it works. If you take out a $50K home equity loan and then put down $50K on a rental property, you can elect to have the HEL treated as if it were on the rental. Reg. Sec. 1.163-10T(o)(5) lets you do that. Do a Google search on “1.163-10T(o)(5)” for more information. This link will show you a sample election: www.pkftexas.com/index.cfm/p/103/nid/38 . You attach this election to your return in the year you take out the HEL.
As for the unsecured personal loan, don’t do it. Have it secured by the property in order to deduct.
Re: interest deduction - Posted by Frank Chin
Posted by Frank Chin on February 23, 2004 at 10:58:20:
Carrie:
There’s a few anlges to this.
If you use a HELOC (Home Equity Line of Credit) as a down payment, the interest is deductable on the schedule A.
But depending on your tax situation, I believe in the AMT (Alternative Minimum Tax), form 6251, line 4, you get snagged on the use of the line not related to the improvement of the home.
If your can get a family member to give you a personal loan, you might want to have it done as a second mortgage, it which case it’ll be interest deductable on the “schedule E”.
But again, depending on your tax situation, you may or may not have issues with the “passive activity limitation” rules. If you make less than 100K/year, and your losses on the schedule E is less than 25,000, you can deduct all. Then over 150K, you cannot deduct anything. In between, your lose $1.00 dollar in deductions for every $2.00 additonal income.
Frank Chin
Great Post -Followup Question - Posted by Frank Chin
Posted by Frank Chin on February 24, 2004 at 07:33:28:
Diane:
Great Info.
I have a 100K Home Equity line used not for one business purpose, but by several. Currently, the interest is reported on “Schedule A”.
Part of the line is used for an active business, in an LLC filing a 1065 return, to fund working capital, mainly accounts receivable. Currently, another part of the line is used to fund the rental businees, as tenants from two rental units are now behind on their rents two months.
In reading thru articles on implementing “1.163-10T(o)(5)”, it would appear that in my case, I would have to allocate the interest expense amongst the various buiness activities, i.e in the appropriate rental unit within the schedule E for REI, and in the 1065 for interest paid on the HELOC for the active business.
If this is so, looks like I’ll have to improve the tracking of the use of the HELOC in my business activities. Currently, I use the HELOC plus another personal line to fund working capital needs, and its recorded in one account as “Loans due owner”. Looks like I should at least identify the source of the owner loan to TRACE the source of the funding, and to use a separate SUBACCOUNT in Quickbooks to make the identification easier.
Is the the correct implementation of 1.163-10T(o)(5)?? Plus I’ll have to attach a statement on the tax returns referring to this section.
Thanks.
Frank Chin
Re: Great Post -Followup Question - Posted by me
Posted by me on May 01, 2004 at 04:42:03:
