Interest only payments a write off?

Question

I had interest only hard money every month of the year last year, am I able to write it off as regular mortgage interest?

Michael Plaks · Answer

More bad news for you, @Teddy Grooms.

If it was a rental, your hard money interest was probably paid during the initial rehab, before the property was placed in service. If so - the HM interest is not deductible but is capitalized  into the acquisition cost of the property, along with the cost of the rehab itself. The total is then slowly depreciated.

Disclaimer: some accountants will probably disagree. I hope they will be able to point out justification for their position.

Natalie Kolodij · Answer

Important to note- if this was Hard money for a flip

You don't just write off the interest

It's capitalized as a holding cost and netted into the gain/sale on the flip in the year you sell.

Michael Plaks · Answer

My experience has been that absolutely nothing - not even prior IRS audits - can keep investors from DIY-ing tax strategies incorrectly. :)

Natalie Kolodij · Answer

On a public forum I typically go with the general rule.

Keeps people from taking your public advice and applying it incorrectly themselves.

Michael Plaks · Answer

Are you sure about this? Capitalization of interest is required by UNICAP rules of Sec. 263, however taxpayers with under $25 M in gross receipts are exempt from UNICAP.

The distinction is subtle but can be important. Say you bought a flip in October 2018, rehabbed it in Oct-Dec and then sold in Jan 2019. If you capitalize interest, it is deducted in 2019 against the sale price.  If you do not capitalize it, it is deducted in 2018. Thoughts?

Teddy Grooms · Answer

@Natalie Kolodij thank you for chiming in! That’s very good to know ☺️

Teddy Grooms · Answer

@Kyle J. Great, thanks for the response!

Teddy Grooms · Answer

@Greg Scott that’s great, thank you!

Kyle J. · Answer

Interest paid on a hard money loan secured by real estate is tax deductible just like any other mortgage interest.

Greg Scott · Answer

Interest is an expense.  Expense is a write-off against Income.

So, unless in your personal situation is unusual, the answer is yes.

Interest only payments a write off?

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