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Friday, March 15, 2013

US Interest Expense

In a previous post I passed on what I had heard or read somewhere: that the IRS would only allow interest from a loan or mortgage registered against the rental property to be deducted from rental income in calculating taxable profit. A reader very politely pointed out that he couldn't find any substantiation for that in IRS publications.

After some searching, I found this document that seems to be the IRS position on the ins and outs of interest: http://www.irs.gov/pub/irs-pdf/p535.pdf

The way I read it, interest is deductible if it is clearly in support of the business, and there is a description of rules around that determination. It does say that mortgage interest is generally deductible, but I did not interpret it to say that was the only interest that was.

You can reach your own conclusions. My interptation is that if it is not a mortgage or other loan secured by the property, then care would be required to ensure there is no doubt that the loan was clearly for the business...but you may have some latitude.

Thanks to the sharp-eyed reader!


  1. If you had the choice between taking out $40,000.00 of your inherited cash which is part of a larger IRA to pay off debts (but did not have to sell stocks to get that $ & your tax bracket is $15% but perhaps less since I am on SSD & earn less than 14,000.00 a year) or take out a 9% re-fill on a 2nd home, which is being rented for $1000.00 a month that will be sold in 3 years with a contract)- is it as simple as comparing interest rates to decide that a 9% re-fill is a better deal than a 15% deal? ( the 9% is non-negotiable as I can only get a "no doc/no asset loan" at that tax brackets unfortunately)or are there other matters to consider.

  2. Whoa...outside of my expertise. Off the top I suppose the nominal interest rates are a key factor. But I would be looking at after tax effects. I.e. when you make interest (or dividends, gains) you pay tax on it. Interest on a rental property could be deductible against the rental income. But you should probably talk to a tax professional.

  3. Couple things to fine tune (I'm a lender 30 years in US closing loans for Canadians this is not legal advice this is not tax advice it is a beware statement)
    See IRS rules on: US trade or business
    Non US resident who fails to submit a timely filed IRS income tax return loses the ability to claim deductions against the rental income, causing the gross rents to be subject to the 30 percent tax. State taxes are also due in property state location, and penalties incur from some states that are more stringent than the Fed.
    Mortgage interest deducted on the IRS/state returns must be on loans / deed of trust filed on subject property. Canadians often use line of credit on primary to purchase but this would not be deductible on the US federal or state returns.
    Also – LLC or LLP vesting limits the ability to be able to get a mortgage on subject in the US

    1. Sounds right. What do you mean by "LLC or LLP vesting...?" Thanks