Interest deduction for line of credit

[Paul C.]

Wondering if someone knows the answer to these tax questions... perhaps @Steven Hamilton II ?

If you use a line of credit to finance the purchase of a rental property (not a HELOC), I know the interest is tax deductible. My question is, do you have to deduct the interest on Schedule E against the specific property the funds were used to purchase? Or, can you deduct the interest on Schedule A as investment interest?

If both are possible options, what are the pros and cons?  It seems to me that putting it on Schedule A would be preferable as it could potentially offset some interest income from non-rental property investments.  If it goes on the Schedule E and there's already a tax loss from depreciation, then the interest deduction would not result in a lower tax bill, but simply get carried forward to offset future rental income.  Am I thinking about this right?

Thanks

[Wilson Churchill]

The deduction for investment expense is limited by a 2% of AGI floor. There is no such limitation for Schedule E. You may be able to deduct a rental loss against ordinary income if you qualify for the special allowance. Also, if you look at the instructions for Schedule A, Line 14, it states that investment interest does not include any interest allocable to passive activities. Without reading the regulations, I assume this would not be allowed:

"

Line 14
Investment Interest
Investment interest is interest paid on
money you borrowed that is allocable to
property held for investment. It does not
include any interest allocable to passive
activities or to securities that generate
tax-exempt income."

http://www.irs.gov/pub/irs-pdf/i1040sca.pdf