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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Is loan interest deductible against rental income?
Tax Talk

Rental home equity loan
 

Dear Tax Talk,
I own a rental property with a $55,000 balloon note due in four months. I also own a second rental property valued at $100,000 with no mortgage. I am considering taking out a home equity loan on my second property to pay off the note. Will the mortgage interest that I pay on the home equity loan be deductible against the rental income from the second property?
-- Nadine

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Dear Nadine,
Interest expense is allocable based on the use of the proceeds of the loan that the interest is paid on. Interest is expense is allocable to the a number of activites.


Interest expense can be allocated to
Nonpassive trade or business activity interest.
Passive trade or business activity interest.
Portfolio interest.
Personal interest.
Investment interest.

Rental real estate borrowings are considered passive trade or business activities. In a refinancing, you would allocate the new loan back to the activity for the loan you paid off.

An individual's rental real estate activities are reported on Schedule E. Schedule E asks that each property's income and expenses be presented in a single column. In your case you have two properties, so the property that has the balloon note, for example, would be column A and the second property without debt would be property B. Previously, you deducted the interest on the balloon mortgage in column A; now you'll deduct the interest on the refinanced property under the column B property.

Bankrate.com's corrections policy -- Posted: May 20, 2008
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