I know that to deduct interest on a loan obtained to buy a person's residence, the loan must be secured by a mortgage.
But if this is rental property, never used as the owner's residence, is there an issue in buying the property with a loan that is not secured by mortgage?
Thanks for any insights.
___ Stu
As I read Pub 550, it seems that the loan for rental property doesn't have the same restriction, "secured by the property" as does a first home. You can buy a rental (or a stock, but not a tax free bond) with a credit card and that interest becomes deductible given a proper paper trail.
There is no requirement that your rental property have a mortgage secured by the property. You can use a personal loan to buy the property and you would be able to deduct the interest on the amount used to buy the property on Schedule E. The issues are 1. Tracing the proceeds of a loan to the rental property and 2. Allocating the proceeds of a loan to different uses and calculating the interest if the loan is used for multiple purposes.
The easiest way to ensure that the proper amount gets allocated (if allocation is required) is to keep the funds separate. All of this is explained in Chapter 4 of IRS Pub 535.
To quote someone from another discussion group:
"The tracing rules aren't designed to encourage deducting interest."
Thanks to you, Alan and Mark for your help. I appreciate it.
___ Stu
Not only that, but you don't have to worry about the $1 million (or $1.1 million in some cases) limit on the loan -- ie, that only the interest on the limit amount can be deducted and the rest is lost. And you don't have to worry about itemized deduction phaseout either, and the interest paid can generate a net operating loss as well, and it lowers your AGI.
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