"Wayne Rivers" <wayne[at]wayneriverscpa.com> wrote:

- quote -

Deductibility of the interest on debt follows the use of the
debt proceeds. In this case, while the rental properties
secure the debt, the proceeds were used for a purpose
complete unrelated to the rental activities. Therefore, the
debt will be capitalized to the development project not to
the rental properties.

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Wayne Rivers wrote:

- quote -

As I understand it, you have to use the interest tracing
rules.

- quote -

Sure. You capitalize the interest into the new land, not
into the duplexes, though.

- quote -

Interest on funds borrowed for uses other than the rental
activity isn't associated with the rentals.

- quote -

You have to figure out how the structure of the money going
into the partnership affects the treatment of the interest.
If he made a capital contribution, he might have
Unreimbursed Partnership Expense on Sch E pg2, but I'd have
to do some research to see if that would work. If he lent
the money to the partnership, he's got interest income, some
sort of interest expense (SchEpg2 or investment interest
expense), and the partnership capitalizes the interest it
pays him.

Phoebe

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Just wondering if anyone has run into this situation:

A client of mine mortgaged his rental duplexes to come up
with money to invest in land (in a partnership where he is
general partner) that will be developed and subdivided for
sale a few years from now.

Since interest to finance the develop the property is
required to be capitalized, he wants to capitalize the
interest on his duplexes. Is this possible? I would think
that since the interest is associated with the rentals, it
would have to be deducted from rental income and not
capitalized. Does it make a difference that we are talking
about two different entities (a taxpayer and a partnership)?

Thanks for any help,

Wayne Rivers, CPA

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >