Is Trace Rule still valid?

Technical topics regarding tax preparation.
#1
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Client plans to borrow a loan from his primary residence to pay off the loan on a rental property. The mortgage interest of the new loan can still be traced to the rental property and claimed as its rental expense. Am I correct?
 

#2
Nilodop  
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Reg. 1.163-10T(o)(5)
 

#3
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Nilodop wrote:Reg. 1.163-10T(o)(5)


Thank you, I think you point to the trace rule and I understand about it.

My question though is related to the Tax Cuts and Jobs Act in 2018. I think we all know the TCJA made deduction of refinanced loan interest from a primary residence much more restrictive than before. I understand under the TCJA, the interest is possibly deductible only if the refinanced loan proceed is used on the improvement of the primary residence. In this particular case that I am asking about, the loan proceed is not to be used back on the primary residence but to be used on a rental property. I understand the mortgage interest deduction can be traced to the rental property under the trace rule before 2018. My question is whether or not the TCJA has disqualified the trace rule to be applied in this situation so that now the mortgage interest cannot be deducted as an expense of the rental property in this scenario.
 

#4
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TCJA did not change interest tracing.
 

#5
mariaku  
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You need to make an election to treat proceeds of your home mortgage refi as not home mortgage interest, in order to get this treatment, and keep good records for tracing rules purposes.
 

#6
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TaxMonkey wrote:TCJA did not change interest tracing.


Thank you TaxMonkey.
 

#7
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mariaku wrote:You need to make an election to treat proceeds of your home mortgage refi as not home mortgage interest, in order to get this treatment, and keep good records for tracing rules purposes.


Thank you mariaku.

How the election is to be made?
 

#8
Keyad22  
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Attach a statement to the return is recommended, although not required.

ELECTION OUT OF TREATMENT AS DEBT SECURED BY QUALIFIED
RESIDENCE UNDER TEMP. REG. 1.163-10T(o)(5)
Taxpayer hereby elects for this tax year and all subsequent years to treat the following debt as not secured by a qualified residence:
Amount of Debt

Name of Lender

Loan Number
 

#9
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Thank you Keyad22.
 


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