mortgage interest deduction two homes one is now a rental

[LSTAX]

Hi,

A taxpayer has a home secured by a mortgage with a principal balance of $400,000 and a HELOC with a balance of $100,000 both loans originated in 2016 before TCJA.  He purchased a new home in 2019 with a new $600,000 loan.  He lives in the new house and started renting out the first house in 2019.  Since the first house is now a rental property reported on schedule E, can he deduct all of the interest on the new loan interest on schedule A and all of the previous loans on schedule E? - or is he limited by $750,000 cap and can only deduct interest on the first $250,000 of the $600,000 loan?

Thank you for your help

[TaxGuyBill · Accepted solution]

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@LSTAX wrote:

can he deduct all of the interest on the new loan interest on schedule A

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Yes.  Mortgages on rental property do not count towards the limit.

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@LSTAX wrote:

and all of the previous loans on schedule E?

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Only if all of the loan was used for the property.  If any of the loan (such as the HELOC) was used for personal items, that portion would not be deductible.

[LSTAX]

Thank you! 

[LSTAX]

new information on the HELOC - it originated in 2016 as stated but was originally for $125,000 and the entire amount was used in 2019 for the down payment on the new house that is now the tax payer's primary residence.  Thanks for weighing in again.

[TaxGuyBill]

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@LSTAX wrote:

new information on the HELOC - it originated in 2016 as stated but was originally for $125,000 and the entire amount was used in 2019 for the down payment on the new house that is now the tax payer's primary residence.  Thanks for weighing in again.

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That doesn't make sense.  The way you phrased it sounds like they borrowed $125,000 in 2016, it sat in their savings account for 3 years, then spend on the new house.

At any rate, if the borrowed money was not for the rental, it is not a rental expense.  Even if it was used for their new personal home, because the mortgage is not secured by there personal residence, it is not deductible on Schedule A either.

[LSTAX]

I believe that is exactly what happened.  So not deductible on either schedule A or E.

I'll bet he deducted the entire HELOC $125,000 on schedule A (was primary residence in 2016) when he took out the money.  Plus wouldn't only $100,000 of the HELOC have been deductible in 2016 pre-TCJA?