10T Election - Spidell

10T Election

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Message Board 10T Election

This topic contains 3 replies, has 3 voices, and was last updated by Alan Cherry 3 months ago.

  • Author
  • #176290
    Charles Laing



    On page 1-5 of the Real Estate update seminar presentation manual, there is a Caution comment that when a 10T election is made, the entire debt is treated as not secured by the residence.

    1. What about seconds incurred in prior years?

    If the taxpayer can document that the proceeds from the second were used in a business, can a 10T election be made in 2018 for that debt and the interest expense on that debt deducted against the business (partnership, S Corp, Sch C, etc.)?  Or does the 10T election only apply to new second home debt in incurred after law change.

    2. What is the impact of the Caution statement?



  • #176466
    Mike Giangrande


    Once you make the 10T election, it applies to the entire loan (not the entire debt on the property). If you have a second mortgage on a property and the proceeds were used for a business, rental property, etc., then you can make the 10T election at any time and trace those proceeds over to Schedule C, E, etc.

    The 10T election does not have to be made when the funds are originally borrowed. The election can be made at any time, but once it is made, it applies for the year of the election and all years thereafter.

    The impact of the caution statement is to warn you that if you have a second on a home and use 1/2 of the proceeds for a Schedule C business (or rental, etc.) and 1/2 of the proceeds for home improvements, then once you make the 10T election and treat the entire loan as not secured by the property, then interest on the 1/2 of the proceeds that were used for home improvements are no longer deductible on Schedule A. The reason they are no longer deductible on Schedule A is because the loan is no longer treated as secured by the home, which is a requirement for deducting interest on Schedule A.

  • #176489
    Charles Laing



    Thank you for your reply.

    That will important information as we consider 10T elections for clients.

    Charles Laing


  • #176499
    Alan Cherry

    There’s an old court case that disallowed everything.  I don’t remember how broad or precedential it was but it certainly conflicts with later opinions.

    For example, IRS on page 13 of Pub 535 says, “If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan’s proceeds.”  That’s not an election–you have to do it.

    And when you do, page 14 of Pub 936 says “If you did use all or part of any mortgage proceeds for  business, investment, or other deductible activities, the part of the interest on line 16 that is allocable to those activities can be deducted as business, investment, or other deductible expense.”

    So do it the way IRS says–just don’t make an election.