Mortgage Interest and Other Interest Costs
For a building investment property deductible interest can be a little complex. General guidelines are listed here, but you would be very wise to consult with a tax professional for specific advice on your property.
For most types of investment property, the interest paid while improving, building, or constructing the real property falls under the Uniform Capitalization Rules, IRS code section 263A which requires that the interest incurred during construction or improvement should be capitalized instead of currently deducted.
After completion of the building or improvement, the interest becomes deductible as it is paid. If the building is available for lease, the interest is deductible on the Schedule E, as a rental property expense.
If the building is being held for resale, the interest after completion of construction can be handled in one of two ways: It can be taken as an itemized deduction on Schedule A, or an election can be made to capitalize the interest and add it to the cost of the building, thus delaying the deduction until the building is sold. This election must be made with the tax return when you file. Reference IRS code section 266, or see your tax professional, for more details on making the election.
This election, called an election to capitalize carrying charges, can be very valuable if the taxpayer does not have enough other deductions to take itemized deductions, or if it is desired to match the deduction to a year of higher income.