You are here:

Tax Law (Questions About Taxes)/mortgage interest deduction

Advertisement


Question
I guess this must be a difficult question or I have not provided enough information, I have had 2 CPAs respond that they are unable to answer the question. If it is because more information is needed, please let me know what that additional information is. Or, if any other reason, I would really appreciate knowing why this question cannot be answered, Thank you.

I am going to refinance with cash out to buy a property in Florida. My plan is to rent the property for the next 5 years so during this time it will be an investment property. After 5 years, I will no longer rent it and will use it as a seasonal home during my retirement. Thus itís status will be changed  to a second home.
My question is concerning the financing of this home. Here is what I plan to do to finance this home:

1. My current mortgage is 178K on my primary residence. The Value of my primary residence is 553K.

2. The cost of the home/condo in Florida that I plan to purchase will  be 200K. I plan to put down 20% and finance the remainder 160K via a cash out refi.

3. The cash out refi on my primary residence will be for the amount of the current mortgage (178K) plus the balance on the florida home (160K) for a total of 338K. This is a 61% loan to value ratio. Note: I have a 100K HELOC when added to the mix would put my loan to value ratio at 79% but there is no balance on the HELOC so I could close it out or lower the limit to 50K in order to lower the loan to value ratio to 61% or 70% respectively.

4. Assuming I execute this plan as described above, my question is how do I treat the mortgage interest on the total refi amount:
a) 178K of the 338K mortgage is home acquisition debt and can be deducted on my schedule A as home mortgage interest. This is clear to me.
b)  How do I treat the remaining 160K mortgage interest for tax purposes? The way I understand the tax rules, I have 2 options:

1) the remaining 160K is a deduction on my schedule E as a rental property expense or

2) 100K of the remaining 160K is treated as home equity debt and can be deducted along with my primary residence deduction on schedule A (as allowed by IRS). Thus I deduct the mortgage interest for 178K (home acq, debt) + 100K (max allowed home equity debt) = 278K on my schedule A.
What about the mortgage interest on the remaining 60K? Can I deduct that on my schedule E?

Answer
Hi Ian.

I am in CT> happy to do your returns... this is just chat among friends, not an engagement letter to represent you.  

But short story long, either of your stated options are legal and correct.  and yes, you would take the remainder on schedule E.

P

Tax Law (Questions About Taxes)

All Answers


Answers by Expert:


Ask Experts

Volunteer


MEdusa

Expertise

Tax and general business including hospitality related (hotel mgmt degree and experience in industry prior to obtaining ms tax and cpa).

Experience

19 years cpa. ms tax. NOTE: My discussions are only a general information and do not constitute tax advise without entering into a specific agreement and executing an engagement letter; This free chat is nothing more than general information and should not be construed as tax advice nor does my response or replies imply an agreement to provide client specific advice or other guidance for purposes of avoiding IRS tax or penalties and should not be relied upon without your own validation and confirmation of the how the discussion may fit your facts... Not having all the facts and/or not having a direct client relationship prevents me from providing the most accurate replies as possible and I highly suggest using a local CPA to provide you with written advice and guidance. Taking matters into your own hands is much akin to trying to land an airplane without a license. It is easy to FLY a plane, but LANDING is when critical experience is key. In short, caveat emptor; do your homework and don't just rely on free chat board advice anywhere, anytime.

Organizations
AICPA, CSCPA (Ct society), National Tax,

Publications
a bunch.

Education/Credentials
MS tax and other post graduate coursework

Awards and Honors
variety including Summa Cum Laude

Past/Present Clients
I don't disclose or kiss and tell

©2016 About.com. All rights reserved.