If I take equity out of my primary residence by doing a cash out refi, and that equity is used to buy a rental property, is the mortgage interest deductible? Everything I've looked at seems to point to it only being a deduction if it's used to make capital improvements on your primary residence. But that doesn't make sense since you can do a cash out refi on a rental property and deduct all mortgage interest. A loan is a loan, so I'm not clear on the tax rules.
If the answer is no, that you can't deduct mortgage interest from a primary home cash out refi, why would anyone ever do it? Seems like it'd make more sense to just get a new loan on the property that can be fully deducted. This is significant. On a $200k house at 4% interest, you'd be missing out on an 8k deduction, which would likely outweigh the cost of the higher interest rate associated with a rental property.
Am I wrong here?
HI @Corey M. -
Taking out a loan against your primary residence could benefit your tax situation in a couple of ways, but you should talk with your tax advisor. Full disclosure…although my degree was in accounting 30 years ago, I have never practiced as an accountant. Be sure to talk with your tax advisor for what I am about to tell you.
There are a couple of ways that you could benefit. First, taking out a mortgage against your home should allow you to reduce your adjusted gross income by the amount of the interest that you are paying for the loan. Your best bet, however, might be to expense the interest you pay on your Schedule E as an expense against your rental income. Of course, you might have formed an LLC for the property. Then you would deduct the interest on the LLC's return as a legitimate expense against the property's income.
Once again, I am not an accountant and to not purport to be one. You should always discuss your particular tax situation with your tax advisor.
HI @Corey M. -
Taking out a loan against your primary residence could benefit your tax situation in a couple of ways, but you should talk with your tax advisor. Full disclosure…although my degree was in accounting 30 years ago, I have never practiced as an accountant. Be sure to talk with your tax advisor for what I am about to tell you.
There are a couple of ways that you could benefit. First, taking out a mortgage against your home should allow you to reduce your adjusted gross income by the amount of the interest that you are paying for the loan. Your best bet, however, might be to expense the interest you pay on your Schedule E as an expense against your rental income. Of course, you might have formed an LLC for the property. Then you would deduct the interest on the LLC's return as a legitimate expense against the property's income.
Once again, I am not an accountant and to not purport to be one. You should always discuss your particular tax situation with your tax advisor.
Thanks for your reply. What happens if I were to pay for a place with $100k cash now, but then I take out a cash out a cash out refi for 100k @4%. Since I already bought the house with my own money, can that "new" money from the refi replace the original $100k for tax purposes since it has interest that can be written off?