Interest Deduction for Rental Property Owners

[Terry D EA]

I am trying to find a definitive answer regarding the deductibility of mortgage interest to rental property owners under the new tax law. Does the 10,000 cap apply. My reasoning is: Frist, for a rental property owner the mortgage interest would not be a deduction but an interest expense. After reading several articles regarding the new tax laws, what I have found that it appears rental property owners regardless of their structure, would be subject to the limitations of business interterest to 30% of business investment income. Other words, the interest expense deducted cannot exceed 30% of the rental income. Code section 163d exclusively describes "property held for investment" which in my opinion includes rental property. 

So, it appears if the interest deduction causes a loss, then it is not deductible but can be carried forward. Can anyone provide some clear answers and references to this.

[Abby Normal]

If the new business interest expense limitation applies to rentals, there is an exception for small business with average gross receipts of $25 million or less, so I don't see how it could be a problem for most rental properties.

 

[Lynn EA USTCP in Louisiana]

The $10,000 cap is specific to Schedule A

[TAXMAN]

The way I read it is that if that mortgage was used to buy or improve the rental the all is deductible unless you exceed the 25m cap. I don't think any of mine will anywhere's close to that.

[SaraEA]

I believe that real estate investors, even those with more than $25m gross receipts, are exempt from the interest cap.  Tax attorneys are still trying to figure out if rental property is a "trade or business."  We'll just have to wait until IRS issues guidance and/or Congress makes technical corrections, hopefully in time for us do to some tax planning before the 2018 filing season.  Isn't tax simplification fun!

[Terry D EA]

On 1/24/2018 at 10:31 AM, Abby Normal said:

If the new business interest expense limitation applies to rentals, there is an exception for small business with average gross receipts of $25 million or less, so I don't see how it could be a problem for most rental properties.

 

Can you give me a resource for this? I have looked in several places and don't remember seeing  the exception you speak of. Of course, I do see you are saying "If the new business interest expense limitation applies"

[Lee B]

Go to the thread pinned at the top of the page, "Resources on new tax law" and read pages 44 - 48 of KPMG's analysis.

[DANRVAN]

4 hours ago, Terry D said:

Can you give me a resource for this? I have looked in several places and don't remember seeing  the exception you speak of. Of course, I do see you are saying "If the new business interest expense limitation applies"

Look at the sect. 163(j)(7)(A).  Also,  per section  163(j)(7)(A)(ii).  an "electing real property trade or business" is not considered a "trade of business" for the interest expense limitation.  An "electing real property trade or business" is one that is described in sect. 469(c)(7)(C) as a real estate prof. and makes an irrevocable election to use ADS.  

So as with the new section 199A deduction, it looks to me that case law and sect. 469(c)(7)(C) will determine whether a real estate rental is a trade of business in regards to the business interest expense limit, unless we hear otherwise from a rev. ruling or tech. corrections.

[Abby Normal]

From CCH analysis:

A taxpayer may also elect to exclude from the [business interest] limitation any real property trade or business as defined under the passive activity rules (Code Sec. 163(j)(7)(A)(ii) and (B), as added by the 2017 Tax Cuts Act). An electing real property trade or business is any real estate development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Thus, interest expenses paid or accrued in the electing real property trade or business is not business interest subject to the limitation. The election is made at a time and manner as provided by the IRS. Once made, the election is irrevocable.

Comment 

Under the passive activity rules, the way in which a taxpayer otherwise groups activities does not control the determination of the taxpayer's real property trades or businesses (Reg. §1.469-9(d)).

Comment 

If a taxpayer elects to exclude a real property trade or business from the business interest limitation, then the business must use the alternative depreciation system (ADS) for certain property (Code Secs. 163(j)(10)(A) and 168(g)(1)(F), as added by the 2017 Tax Cuts Act). This includes any nonresidential real property, residential rental property, and qualified improvement property (¶405) held by the electing real property trade or business (Code Sec. 168(g)(8), as added by the 2017 Tax Cuts Act).