Interest Expense (again)

[Diane]

Client has 2 homes (interest on Schedule A) and 3 rentals. He purchased a 4th home in 2010 with intentions of renting. But, so far, has not rented. He has been renovating and repairing. Not rented in 2011 either. What do you do with the mortgage interest? I don't think it qualifies as investment interest expense.

Diane

[jainen]

>>What do you do with the mortgage interest?<<

In court they would say that question lacks foundation. It assumes that there is something to be done with the interest.

[Pacun]

add it to the basis.

[kcjenkins]

IF it does not qualify as Investment interest then it should be capitalized, just as the repairs are, and becomes part of his basis. Once repairs are finished, and actually on the rental market, it's deductible rental interest expense. Ditto for the taxes, btw.

[jainen]

>>IF it does not qualify as Investment interest then it should be capitalized, just as the repairs are<<

Interest and repairs can not increase the basis of a house any more than of a car. Oh, I suppose you might call them section 195 Start-up costs, but when "renovating and repairing" goes on for years I would ask for a genuine business plan, The Section 266 election to capitalize specified carrying costs (not including repairs) only applies to unimproved land.