Dear Tax Talk,

We took a $100,000 loan against a primary residence to help pay for an investment (rental) property. We used $70,000 of the loan to pay for the rental property. Can we use the mortgage loan interest on the portion of the loan used to help pay for the rental property ($70,000) as a deduction against the income from the rental property?

— Andrew

Dear Andrew,

The interest will not be allowed as a deduction against the rental income because the mortgage was taken out on your home and not on the rental property. However, if you meet the mortgage loan interest deduction requirements, the interest may be deductible on Schedule A, Itemized Deductions.

How it works

Interest generally is tax-deductible on loans taken out for both rental and primary residences.

However, you cannot deduct interest payments on a loan secured by your primary or secondary residence against rental income from investment property, even if the loan funds were used to buy the rental property.

Home mortgage interest is interest you pay on a loan secured by your home or a second home. This includes a mortgage to buy your home, a second mortgage, a line of credit or a home equity loan. In order to deduct your home mortgage interest, you must file Form 1040 and itemize your deductions on Schedule A. Additionally, the mortgage must be a secured debt on a qualified home in which you have an ownership interest. Generally, you can deduct all of your home mortgage interest, but there are certain limitations based on the date the mortgages were taken out, the total amount of the debt and the use of the proceeds.

For your rental property, you will report your income and all other expenses other than the mortgage interest on Schedule E, Supplemental Income and Loss.

Thanks for the great question and all the best to you.

Ask the adviser

To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.

Promoted Stories