Rental Property Tax Questions

[David Beard]

OK, tax pros, please answer these scenarios for a buy-and-hold investor that materially participates in their rental activities:

1) You draw down on your personal residence HELOC to finance a rental property. You do not have enough Sch. A deductions to itemize. Can you write off HELOC interest related to the rental property acquisition on your Sch. E?

2) You buy a property in January (financed with a loan secured by the new property), rehab it, and "place it into service" (i.e. advertise it for rent) in April. How do you treat the taxes, insurance, utilities, and mortgage interest you pay during the Jan-Mar rehab period?

3) Same as (2), except you bought and rehabbed the property using a credit card or unsecured LOC. How do you treat the credit card interest during the Jan-Apr rehab period, as well as after you "place the property into service"?

4) Same as (2), except you bought and rehabbed the property using a new loan secured by a free&clear property you own. How do you treat the interest on the new loan during the rehab period? Which property do you attribute the interest to, both during the rehab period, and after you "place it into service"?

Thanks.

[Account Closed]

1) Deducting the interest in this situation can be a little tricky. How the funds are used is going to matter greatly. Your safest bet would be designating the funds you pull out for one activity. If you use it exclusively for your rental property business the interest is tax deductible on your Schedule E.

2) The taxes, insurance and other expenses prior to the "service date" need to be capitalized as part of the rehab and expensed over the life of the improvement.

3) Credit card interest can be tricky. If you use this exclusively for your rental activities you will be able to deduct the interest. The interest Jan-mar though must be capitalized and the interest after being placed in service can be expensed as a period cost.

4) The loan purpose is what counts here not the collateral. So the interest would be allocated to the new property similarly to situation 3.