I plan to obtain a refinance cash out on my primary home of $300K and use the proceeds as a down payment on a rental investment property. I have been advised by a mortgage broker that the interest rates are lower if I used my primary home, instead of borrowing on the investment property. My home is fully paid for. I have received mixed advice from my broker and CPA. My CPA says that only the interest expense of $100K of the $300K would qualify as being deductable on my schedule A and the remaining interest on $200K could be taken as a deduction on schedule E. My broker says all the interest would be deductable on my schedule A. My question is who is right or does it make a difference? Thanks for your advice.
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.
Your accountant is right, your broker is wrong. Actually, your accountant left out an option -- you could take all of the interest on Schedule E. The choice of how much interest (of the up to $100,000 of principal) may be affected by issues such as your AGI, other deductions, and rental gain/loss before considering the interest deduction.You will want to minimize your taxable rental income, but if your AGI is too high or you do not actively manage the rental, you will not want to show a passive loss, so you will want to put "more" interest on Schedule A.If you do not otherwise itemize deductions, you may get more tax benefit from taking all the interest on Schedule E.If you are in the phase out region for itemized deductions, you may get more tax benefit from taking all the interest on Schedule E. Your accountant can work out the scenarios based on your specific situation.Ira
My question is who is right or does it make a difference? I think both are right, as far as they've gone. There is definitely a limit on Schedule A nonacquisition home mortgage interest: interest on $100,000. However, I see no reason why this would not be fully deductible on Schedule E.However (doncha love tax law?), as previously noted, there are limits on the losses that you can realize from passive activities, including this type of rental. The limit is based on your AGI.A Schedule E deduction is usually better than a Schedule A deduction because it lowers AGI. However, if you can't benefit currently from the Schedule E deduction because of the passive loss limitations, you'd probably be better off taking what you can on Schedule A and putting the rest on Schedule E.Finally, in general, CPAs are better tax advisors than morgage brokers. I second the recommendation that you have your CPA thoroughly explain the issues to you. You can do a little pre-reading in IRS Publications 550 and 527.Phil MartiVITA Volunteer
Ooops!Meant to write....The choice of how much interest (of the up to $100,000 of principal) you claim on Schedule A may be affected by issues such as your AGI, other deductions, and rental gain/loss before considering the interest deduction.
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