That means that if you can get away with borrowing less to make the purchase, then you'll have smaller non-deductible passive loss problems. By borrowing less, you may even be able to eliminate non-deductible passive losses completely. There are other interest strategies you may want to consider as we'll see in the next section. The deductibility of interest is one of the most complicated areas of the tax law. Before we go into how these rules affect your purchase of an investment home, it's helpful to review the rules generally.
Interest is only deductible if it fits into certain defined categories.
Suppose you're looking to buy a piece of equipment in your practice, and you can either borrow to finance it or pay cash. If you might be buying rental property at some future time, you're better off financing the equipment, where the interest will be tax- deductible, so that you'll have to borrow less to buy the rental property. The deductibility of home mortgage interest provides several planning opportunities. In order to understand these, it is helpful to review how home mortgage interest is deducted. Acquisition indebtedness basically includes any and all mortgages you take out to buy, build, or substantially improve a qualifying first or second residence, or any refinancing of acquisition indebtedness that isn't for a larger amount than the loan you're refinancing.