JanZtax wrote:

- quote -

I don't think she needs to spend the "excess" proceeds
exclusively on rental activities. Spending for "business"
purposes or "investment" purposes should also qualify
(subject to their own related restrictions). But, if she has
commingled the funds, the "tracing rules" would have to be
followed. If the borrowed funds aren't spent within (as I
recall) 90 days of receipt, there could be additional
problems or issues. Also, the annual interest expense would
have to be allocated between the various activities per IRS
regs and/or rules which, as I recall, are not exactly
"straightforward." <g> .

But, I wouldn't suggest proceeding with some business or
investment venture SOLELY for the purposes of securing tax
deductibility of the interest.

MTW

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My client carefully did a 1031 exchange on her rental
property, then immediately did a cash out refinance on the
new property, believing that she could spend the refinance
proceeds in whatever way she wanted. When I explained to her
that money from a rental property refinance had to be spent
on rental property if she wanted to deduct the interest, she
was very upset. So, she's looking for ways to spend the
money (she doesn't need it for the rental property) in such
a way that she can deduct the interest.

Today she sent me information about investing in deeds of
trust. As I look at the material, it seems as if this would
be considered investment expense rather than rental expense
and therefore, would not solve the problem. Is that true?

Any thoughts?

Jan Zobel EA

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