Portfolio Loan interest....is it deductible?

Question

I'm in the process of combining 5 of my investment properties (currently individually mortgaged) into a portfolio loan.  Is the interest paid on this new portfolio loan deductible just the same as the mortgage interest on the conventional loans?

John Duston · Answer

Short answer is yes.

The long answer is that the interest follows the use of funds. In your case we would allocate the interest between the 5 existing mortgages and for the extra $150,000 that you took out, it would be deductible on the business ventures. In this specific case that is likely more tax advantages which often isn't the case with interest tracking.

We can still claim start-up expenses just not in the current year.

If you have 5 rentals, an interest allocation, and a new business venture, I think it is well past time to get in touch with a CPA

Olivia Foster · Answer

Thank you for the question. Was interesting to read all answers. Pandemic this year made me ask myself Where and How to Get Emergency Cash for Single Mothers and payday loans are the only way acceptable for me. I've to pay my loans and hope I'll be good with it. Trying to save money from my mortgage, so keep reading and studying.

Steve LeBlanc · Answer

Well you just made this next level difficult.  Never heard of these interest tracing rules, but it makes sense.

The new loan balance will NOT be the same.  The current balance on the 5 existing mortgages is $600,000.  The new loan balance will be $750,000.  The purpose of the loan is to do a cash out as I'm leveraging the equity for another business venture.

I typically do my own taxes.  The new balance will be higher and the extra $150,000 not being used for Schedule E investment real estate, but rather for business startup costs and operating expenses.  My research shows me that only $5000 of business start up costs are deductible, up to a certain amount of expenses.  Therefore, how would one go about interest tracing the $600,000 amount against the 5 properties. Sounds like a fun math problem.

Basit Siddiqi · Answer

@Steve LeBlancYou will have to follow the interest tracing rules.If the new loan balance is the same, likely deductible.If the new loan balance is higher, you may need to track what the additional funds are used for to make it all deductible.

Shaun Weekes · Answer

If your portfolio lender issues you a form 1098 then your CPA will put the mortgage interest from your investment homes on line 12 of your Schedule E. If the portfolio lender doesn't issue you a 1098 then your CPA will need to get an amortization schedule to figure out the interest and put it on line 13 " other interest "

If the interest is on line 13 you will need to get a CPA letter stating how they came to the number listed on line 13 of your schedule E so that the Underwriter understands that it's mortgage interest. This is how you'll be able to add back line 13 for conventional loans.

I hope this helps and have a good one.