No, you can not. I've spent some time looking and I can't find the specific publication I want to reference for you. But in order for the interest to be deductible the loan *must* be for the specific purpose of purchasing, acquiring, expanding or improving the rental property. Since you paid cash for it up front you have already purchased and acquired the property. I seriously doubt you would be using the borrowed money to improve or expand the property. Therefore not one single penny of interest or any of the closing costs would be deductible on SCH E.

A

Anonymous_

Employee

The publication reference can be found at the link below and it essentially applies to home mortgage interest (hence the title, "Home Mortgage Interest Deduction").

Again, if the proceeds are utilized in the current rental activity, a different rental activity, business or other type of investment activity, the interest paid on the mortgage may be deductible via tracing.

https://www.irs.gov/publications/p936#en_US_2018_publink1000229891

N

NCPERSON1

@dak9779 - suggest focusing on this part of the link as provided by @Anonymous_

Mortgage that qualifies later.

A mortgage that doesn't qualify as home acquisition debt because it doesn't meet all the requirements may qualify at a later time. For example, a debt that you use to buy your home may not qualify as home acquisition debt because it isn't secured by the home. However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Similarly, a debt that you use to buy property may not qualify because the property isn't a qualified home. However, if the property later becomes a qualified home, the debt may qualify after that time.

Mortgage treated as used to buy, build, or substantially improve home.

A mortgage secured by a qualified home may be treated as home acquisition debt, even if you don't actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.

You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1, later.)
You build or substantially improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.

A

Anonymous

the IRS has what is referred to as tracing rules. whether any of the interest is deductible depends on the use of the proceeds. since you paid cash for the property before the loan, it could not be argued that the loan was used to purchase the property. However, if you use the loan proceeds to make improvements and repairs on the property then it would be deductible on schedule E. you could use the proceeds to buy another property. if the proceeds just go back into your account, no deduction. used to buy stocks - investment interest on schedule A. a personal trip - no deduction.

N

NCPERSON1

@12309 - I have found this thread fascinating - please look at this link where the IRS specifically says 'tracing' is not deductible .. See example #2.

https://www.irs.gov/newsroom/interest-on-home-eq[product key removed]-still-deductible-under-new-law

Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

A

Anonymous_

Employee

@NCPERSON1 Your link does not seem to work but the one below does and, I believe, it is to the same web site.

https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

However, I can find nothing on that page where "the IRS specifically says 'tracing' is not deductible".

Note, in addition, that the IRS web site here is specifically addressing home mortgage interest (main homes, second homes, vacation homes, et al) that would otherwise be deductible as itemized deductions on Schedule A.