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I *think* that the interest on a loan for an investment property is deductible even if it is not secured by the property. -me

BTW - my thinking is based on my understanding of pub 535

"You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. It does not matter what type of property secures the loan. " [emphasis added]

I'm sure one of the tax pros will chime in here, but I think there are also some specific conditions that must be met. For instance, with TRA86, I was able to refinance a primary residence that was also rental property and take cash out that I used to finance the purchase of my new primary residence. Because I had kept the proceeds of the refi in a separate account and did not mingle it with other funds and because I could track that I then used those funds to purchase the house which, in its own right, was eligible to have the mortgage interest deducted, I was able to deduct that portion of the interest from the rental property mortgage on my own personal residence. The effect was that the rental property showed a paper profit, and I did not have to worry about passive loss rules.

I only was able to do all that out of dumb luck, and not because I planned it that way. It was just easier for me to manage the money if I kept it all separate, and kept adding to it so that I knew how much we had for a down payment.

I am not sure what has changed since that time, but I would think that you'd at least have to be able to show that the funds were used for a tax-related expense.

I'm not sure how a combined loan (part personal, part business) would be handled...
Could you consider the business part to be paid off last? (ex. I pay $5k in interest, $1k in principal, the $1k only applies to the $400K of personal dept, and not the $100K of business debt. Meaning the business expense is always 3% * $100K, while the personal interest goes down each year)
Or do you have to split the principal repayments proportionally between the two parts?

I have no idea, but given how complicated it has now become, I would not do this without professional help.

For the OP, however, he is worried about the resulting size of his new mortgage payment, and so besides all the reasons previously stated on why this isn't the best idea, I think he would have been better off with everything separate so that he could see that the property was covering all of its own expenses, and he would be paying his mortgage just for his primary residence out of his paycheck. Also, if he sells the investment property, he will still have that large mortgage payment as the liability would not be paid from the sales proceeds. Even if he prepaid a big chunk on the mortgage with the proceeds, the monthly mortgage payment amount would not change without doing another refi.

Really, I think he has ended up making this overly complicated, and I don't think he will have any good way to measure if his investment is profitable or not.

I would never mix business assets with personal assets. It's just too messy, and I say this as someone who was a landlord for 16 years, and now has a DH who has his own business, so I do those books as well.

Simple is really a whole lot better.
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