- Passive Loss Rules & Rental Property
- How to Buy Investment Property With a Home Equity Loan
- Tax Deductions for Owner-Occupied Rental Property
- Can I Claim a Rent Deduction for an Elderly Parent in a Home I Own?
- Can You Deduct the Difference From Rent to Mortgage Payments for a Rental Property?
- Can Real Estate Taxes on a Rental Be Taken on Schedule A?
The Internal Revenue Service doesn't limit the amount of interest you can write off against your investment property, so if you paid interest on behalf of your property, it's an allowed expense on Schedule E. You can even write off interest that isn't secured by your rental property. The key limitation is that you can only write off interest that is related to your rental property activities.
Investment Property - Investment Funds
The simplest scenario occurs when you have an equity line secured by your investment property and you pull money out to spend on your investment property or to buy another one. You report and deduct your interest expense from the property that benefited from it in the appropriate column of line 12 on the Schedule E form. For example, if you used an equity line on a rental house to make a down payment for a small commercial property, you'd enter the interest under the commercial property even though the loan was on the house.,
Personal Property - Investment Funds
If you used a home equity line of credit secured by a personal residence to provide money for your investment activities, you have a choice. You can, if you want, deduct up to $100,000 of the interest on the HELOC as a personal itemized deduction under the IRS provision that lets you deduct up to $100,000 home equity debt in addition to the $1,000,000 in home purchase debt. Alternately, you could allocate the interest on the investment property to your Schedule E, write it off there and not write it off on your Schedule A.
Personal Use Funds
The IRS won't let you deduct interest of a personal nature from your rental property's income. For example, if you take out an equity line on a rental home and write a $20,000 check to use the property's equity to pay off medical bills, it wouldn't be deductible. The only way that you can deduct interest on personal-use funds is to take the loan out against your home instead of your investment property.
If you have a loan that is split between multiple purposes, the IRS requires you to allocate its interest to each of the different purposes. For example, if you borrow $150,000 on your investment property's equity line and spend $100,000 on your property and divert for $50,000 for personal use, two-thirds of your interest would be deductible. Calculating the allocation can get very complicated, though, if you borrowed money on your credit line at different times, different rates of interest, or with different repayment dates. Given the potential complexity that this can bring, even the IRS recommends that you use separate loans for different activities so that your calculations will be more manageable.
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