Deductibility of equity loan depends on use

YOUR MONEY

November 08, 1992

Q: I have a single-family home in which I lived for nine years before converting it into a rental. The house has a $50,000 mortgage on it, but is worth $200,000. I would like to refinance the mortgage and take equity out of the house.

Can I still get a tax deduction on the new mortgage? What is the maximum tax-deductible mortgage allowed on a rental house?

A: Because this home is neither your first nor second residence, if your newly refinanced mortgage exceeds $50,000, the critical issue is not its actual amount but the use to which you put the proceeds.

If you use the money for a purpose that is considered tax-deductible, then the mortgage interest is deductible; if not, the interest is not deductible.

So, what's deductible? Investing is a tax-deductible activity, but your expenses can be used only to offset your investment income. Operating a business also generates tax deductions, but again your expenses must be offset by income.

If your new loan had been secured by your primary residence or a qualifying second home, the tax code would have allowed you to deduct the interest on a home equity loan up to $100,000 regardless of how you used the loan proceeds.

Because your loan is secured by investment property, however -- the fact that the house was once your primary residence doesn't matter -- you do not qualify for this treatment.

Carla Lazzareschi cannot answer mail individually but will respond in this column to questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.

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