Sonoma,Broadly sounds like your CPA is right. From what you say, you completely paid off the original loan to purchase your home. What you are now doing is taking a "home equity" loan as opposed to an "acquisition" loan and the amount you can deduct on Sch.A is therefore limited to the interest on $100,000. The remainder you can deduct against the rental income on Schedule E.The difference is that you may not get the current benefit of all of the interest deducted on Sch.E. Basically, since the rental home will be a "passive activity" your rental expenses (including interest) cannot create a deductible loss. The excess expenses get carried over each year until they are either absorbed by income from other passive activities, or you dispose of the property.Go back to your CPA and get him to talk through all this in detail - he knows what he's talking about.
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