How do I deduct this interest? - Posted by Chris

Posted by Natalie-VA on March 28, 2006 at 08:14:52:


I agree with you that you are supposed to show the interest against the house where the loan is. I remember my CPA telling me that. He also said not to worry about it since he’s never seen the IRS perform a “trace” to see exactly where the money came from.


How do I deduct this interest? - Posted by Chris

Posted by Chris on March 26, 2006 at 09:09:35:

If I use funds from a line of credit secured by rental house A to purchase rental house B,do I deduct the interest from schedule E of house A,which secures the note or house B?


Re: How do I deduct this interest? - Posted by Chris in FL

Posted by Chris in FL on March 29, 2006 at 12:34:09:

Chris, I do my own taxes (with CPA guidance), and I believe all that the IRS stipulates is that you have a verifiable trail that the funds were used 100% for the business. If both houses are Schedule E rentals, your tax burden would be unaffected regardless which house you attach the interest expense to, so you are not trying to avoid taxation. However, from experience, it is probably simpler and cleaner to attach it to the house it is secured by (house A). I have multiple properties and HELs, and many times I pulled money out of a property to have cash to buy other property with, and it could get very confusing keeping up with which HELs are attached to which property (for expense purposes), were they not attached to the property they were secured by. Good luck, I hope this helps, and please do verify with a professional tax advisor.

P.S. - every time I do this, I have my HEL check cut directly to the title agency for my new purchase - they can’t argue with my “verifiable trail”.

Re: How do I deduct this interest? - Posted by John Corey

Posted by John Corey on March 28, 2006 at 08:03:24:

Ask a CPA. I am not sure that Randy is correct. I would expect that you deduct the interest paid based on which property shows the loan.

Here is why I think it might not be as Randy suggests.

You borrow $100 from house A. You put the cash into a savings account and now the balance is $200. You take $100 out of the savings account and use it to buy house B. How can one show that the interest charge that is reported by the lender on house A is really an interest charge for house B? There is no tail.

Now, why does it really matter? Unless you are hitting a limit for available losses the combined impact of the interest expense and income from the two properties will more or less cancel.

Though I have never checked closely to see what the CPA did I believe the correct way is to report against the property that actually has the loan. Remember that you claimed when you bought house B you were putting down cash and not taking a loan.

John Corey

Re: How do I deduct this interest? - Posted by Randy (SD)

Posted by Randy (SD) on March 26, 2006 at 09:14:00:

No… schedule E of house B, each has it’s own income and expense.