Where to deduct interest

[MargaretMort]

That is a terrible heading but there it is. I brought this up earlier and am now trying to put the return together. Briefly, client is a realtor, has a son who builds houses. Client is guarantor on a loan for a house son built. House didn't sell, was rented, empty now. Client and son have a note modification agreement with the bank to pay only the interest on the loan for a set number of months. Client is paying the interest, naturally would like to take it as a deduction. The consensus on my earlier question about this arrangement was that if the client is expecting to make money when the house sells, the interest can be deducted.

My problem is that I can't quite decide where to report the interest paid. Can I show it on the Sch C because the client is a realtor? I am at a loss and going round in circles. I sure would appreciate any help or suggestions.

Thanks, as always, MM

[Gail in Virginia]

Is the house still being offered for rent? I would be inclined, depending on facts and circumstances, to either put the interest on the sched. E with the rental income,OR to use Sched A as investment interest. I don't think that it would go on Sched C unless the rental income also went on Sched C.

[MargaretMort]

That is the rub. The house is still available for rent or sale. The son received the rent and paid the bills during the time it was rented. The client began paying the interest only after the note modification agreement went into effect. The more I think about this situation, the less I can find a place to take the interest except, possibly, on the sch A subject to 2%. MM

[grandmabee]

I don't think if would go on A subj to 2% I would put on 4952 investment interest. He does not own the house right? or is he part owner? I still think your only option would be 4952

[MargaretMort]

No, the client doesn't down the house. It is still available for rent or sale. The son and his spouse have taken the rent and expenses in the past, aren't this year for whatever reason, client is not taking the rent and expenses, just wants to take the loan interest that the client has paid out of pocket.

This client has rental income and a large capital gain from income held for investment. I am becoming more confused as I read the various pubs and instructions. Lord, you would think I had never done this before and I must admit, this is a variation I have not run into before.

Thanks again for any assistance. MM

[Lion EA]

Investment interest? Otherwise, it's personal interest and not deductible, I think.