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Tax-Scholar
Tax-Scholar, CPA
Category: Tax
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Experience:  Helping customers comply with and plan for income taxes
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I paid off my primary home in 2007. It is worth about 450k

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I paid off my primary home in 2007. It is worth about 450k now. Beginning of 2011 I took out a loan of 270k against the primary home and bought a condo for rent. I paid cash for condo so there is no mortgage on the condo. I started to rent it out in April 2011.
My understanding is the mortgage is not acquisition loan. My question is, where can I deduct the mortgage interest for the 277k loan(about 12k), in schedule A or schedule E, or split( interest on 100K in schedule A and rest in schedule E according to Pub 936). Which way can avoid AMT?

Our adj gross income is getting closer to 150K , so the loss on the rental activity will be limited. If I can not deduct all mortgage in schedule A, I like to do the 3rd option above (spit) so I can lower the expenses. But will this trigger AMT? Am I on the right track? Any other suggestions? Thanks.
Submitted: 5 years ago.
Category: Tax
Expert:  Tax-Scholar replied 5 years ago.

Tax-Scholar :

Thanks for using Just Answers. My goal is to provide the same expert advice I give my local clients but for a fraction of the fee.

Expert:  Tax-Scholar replied 5 years ago.
Let me find your answer
Customer: replied 5 years ago.
Where is your answer?
Expert:  Tax-Scholar replied 5 years ago.
Under the debt tracing rules I would deduct all of the interest on Sch E for the rental property. See Publication 535 Allocation of Interest. This will require an election to treat the debt as not qualified as a home mortgage. Otherwise the first 100,000 of debt and the related interest will go on Schedule A.

Any interest on Schedule A for Home Equity Line of Credit is an AMT addback. If the additional rental expense for interest creates a suspended loss you could try to put the first 100,000 on Schedule A assuming it doesn't push you into AMT.

The election is found under 1.163-10T(o)(5) and might be hard to make with do it yourself tax software. The Journal of Accountancy has a brief article supported the above see
http://www.journalofaccountancy.com/Issues/2010/Jun/20102639
Customer: replied 5 years ago.

Let me make sure I understand you.

I have two options, both are allowable

 

1. All interest in sch E

2. Interest on 100K in sch A and rest in sch E depending on if it trigger AMT

 

I can try on tax software to see which is better. Am I correct?

Expert:  Tax-Scholar replied 5 years ago.

Yes that is correct.

Customer: replied 5 years ago.
One more question, can I try tax software to put a number other than 100K interest (ie80k, 70K) in sch A to see which is beter? Thanks,
Expert:  replied 5 years ago.
Technically if you make the election it is for all of the debt so it is either 100,000 or nothing in your case. However I'm sure people get this confused.
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