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Old 02-11-2008, 12:54 PM
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Using equity to purchase rental

Hi, I have my primary residence that is almost paid off, I have about 250,000 in equity. I do not have enough cash to come up with a 25% down payment on a duplex, and would like to take out an equity line of credit to make the down payment. Then I would like to borrow enough against the equity to pay off the line of credit, the rest of my 1st mortgage ($20,000) and to purchase a rental for 160,000. This wold leave me with one loan of approximately 180,000. I am pretty sure that I can do that part, but I am wondering if the interest that I am paying on the loan can be used as a write off towards my rental property bussiness that I am about to start or if because the loan is backed by my primary residence, I would have to claim it on my personal 1040 at the end of the year. Thanks for the help. Nate



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Old 02-17-2008, 11:34 AM
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I guess there is not much action on this board



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Old 02-17-2008, 09:37 PM
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I am sorry, but I totally missed your question last week.

As far as the interest that you are going to pay on the home equity loan, used to purchase a duplex, some Tax experts would claim it on your personal tax return on Schedule A as home mortgage interest. Technically, it seems that would be correct as you would get a 1098-Mortgage Interest from the Bank.

But, I think a case can be made for you to consider claiming that interest expense on Schedule E, as it is directly attributable to the duplex purchase.

I would strongly suggest that you talk to your CPA to ascertain what position best suits your tax situation and whether or not you are subject to passive activity limitations. If you are, then none of the interest expense would be deductible on Schedule E, and it might make sense to deduct this interest expense on Schedule A.

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Old 02-18-2008, 11:01 AM
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Thanks for the help. I spoke to a CPA this morning and he said that I should have no problem claiming the interest on sch. E because it is directly related. Thanks again, Nate



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