Tax on mortgage interest payments using BRRR

5 Replies

I love the idea of the BRRR strategy, but there's one thing I can't figure out. Don't you lose the ability to tax deduct interest payments on the mortgage after the "Refinace" part of the strategy. Since the loan wasn't an acquisition loan, and instead a cash out refinance, it seems like you'd lose out there.

Is there any way to get around this?

I have never heard of "losing" the tax deduction after a refinance.  May want to talk to a CPA, but that'd be news to me.  I've never lost the ability to deduct interest when I've done a refi.

all the cpas I've talked to take off the interest payments. Never heard it any other way, and the irs I thought was pretty clear about all mortgage interest bring tax deductible.

OP might be talking about interest tracing.... maybe.  It's a stretch.

Mortgage interest is deductible whether it's for acquisition or refinance.  So long as the building is used as collateral for the loan, it is deductible as mortgage interest on whichever schedule is most appropriate (A or E or 8829 or whatever).

What sometimes happens is that CPAs will apply interest tracing so instead of taking the interest on the property where the the loan is actually secured, they will take it for whatever the loan proceeds were.

This can include people who take a home equity line out on their primary residence and use the proceeds to invest in a home.  It's appropriate to take that interest either on Schedule A, since it is still primary residence loan interest, or in the business where the proceeds were used.

I've not heard of the interest deduction actually being lost though.  Even people who use equity proceeds on a vacation or a new car or to blow at the casino or whatever - they can still deduct primary residence loan interest on Schedule A (or wherever appropriate).

Updated about 2 years ago

**I didn't mean to say "invest in a home..." I meant to say "Invest in a busines..."

Thanks for your input. So I figured if you get a loan to acquire the property and then refi it you'd keep the deduction. I'm concerned if I buy a place cash and then cash out refi I won't get the deduction because the loan wasn't used in acquiring the property.

You guys have made me think that isn't the case though, and you can use the deduction for the refi. Which is great news. (Obviously I'll talk to a CPA ultimately before doing anything.)

If you buy an investment property with "cash", and then do a cash-out refinance, there are a few possible scenarios depending on how you use the funds. 

If you use some/all of the cash-out funds to pay back loans used to come up with the cash to buy the property in the first place, that portion can go on Schedule E for the property. Be conscience of IRS tracing rules. 

If you use the funds for "investment", they can be deducted as "investment interest", but not on schedule E for the property.

If you use the funds for personal reasons, for example to buy groceries, go on vacation, etc, that portion is considered personal interest, and is not deductible.

A decent CPA will be able to walk you thru all this.

Good luck!

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