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David Bennett
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Cash out refi tax question

David Bennett
Posted Nov 24 2022, 16:30

Hi All -

Apologies if this has been discussed 10,000 times before, I searched the forums and struggled to find an answer to my exact questions. I plan on speaking to an accountant closer to tax time, but figured I’d start with some of the knowledgeable folks here.

My questions:

- Is the interest on a cash-out refi on a rental tax deductible?

- Is interest from any refinance on a rental tax deductible?

Thanks so much!

David

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Erik Estrada
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Erik Estrada
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Replied Nov 24 2022, 18:20

Are you using a commercial loan for your cash out refinance or is this a regular (FHA, VA, Conventional) primary residence loan?

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David Bennett
Replied Nov 24 2022, 18:36
Quote from @Erik Estrada:

Are you using a commercial loan for your cash out refinance or is this a regular (FHA, VA, Conventional) primary residence loan?


I’m planning on using a commercial cash out refi. My understanding is I wouldn’t be able to use the latter options because it’s not owner-occupied, correct?

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Erik Estrada
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Erik Estrada
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Replied Nov 24 2022, 18:44
Quote from @David Bennett:
Quote from @Erik Estrada:

Are you using a commercial loan for your cash out refinance or is this a regular (FHA, VA, Conventional) primary residence loan?


I’m planning on using a commercial cash out refi. My understanding is I wouldn’t be able to use the latter options because it’s not owner-occupied, correct?


 What kind of property? 1-4 Unit? or beyond? You can still do a conventional investment property loan refinance on a 1-4 unit. 

Commercial loans are business purpose only loans. I am not a tax professional, but I would think you could deduct the interest from a commercial loan refinance. 

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David Bennett
Replied Nov 24 2022, 19:07

I appreciate this information! Long story short - it’s one unit that I initially purchased as my own home, then moved out and made it a rental. My plan is to do a cash out refi maybe a year down the road when we hopefully see prices drop, then a regular refi 3-5 years down the road when interest rates come back down to earth.


I haven’t spoken to any lenders yet since I’m still a year away, but looking to get my ducks in a row with some baseline information from some professionals here and a tax adviser in a month or two.

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John Morgan#1 Creative Real Estate Financing Contributor
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John Morgan#1 Creative Real Estate Financing Contributor
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Replied Nov 25 2022, 06:42

@David Bennett

Interest on a cash out refi on a rental is tax deductible. However, interest on a primary home cash out refi is not if you itemize. And I’m almost positive it is on a commercial loan.

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Erik Estrada
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Erik Estrada
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Replied Nov 25 2022, 10:02
Quote from @David Bennett:

I appreciate this information! Long story short - it’s one unit that I initially purchased as my own home, then moved out and made it a rental. My plan is to do a cash out refi maybe a year down the road when we hopefully see prices drop, then a regular refi 3-5 years down the road when interest rates come back down to earth.


I haven’t spoken to any lenders yet since I’m still a year away, but looking to get my ducks in a row with some baseline information from some professionals here and a tax adviser in a month or two.


 Happy to connect and answer any questions

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Ash Hegde
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Ash Hegde
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Replied Nov 25 2022, 10:10

With the standard disclaimer of "check with your tax advisor," the mortgage interest paid while the property is a rental (current mortgage or refi) should be tax deductible.

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Bob Stevens#3 Managing Your Property Contributor
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Bob Stevens#3 Managing Your Property Contributor
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Replied Nov 25 2022, 10:15

Call your accountant 

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Allan C.
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Allan C.
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Replied Nov 25 2022, 10:42

@David Bennett seems unlikely that you’ll obtain a commercial loan for a single unit. You will likely be getting a non-owner occupied residential loan since those rates and terms will be better. If you are pursuing a cash-out refi under the circumstance above, you’ll need to document that your proceeds are used for investment purposes to deduct the interest payments.

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James Mc Ree
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James Mc Ree
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Replied Nov 25 2022, 11:35

The interest from a cash out refi on a rental is tax deductible provided you use the cash out funds for capital improvements of the rental. Use of the funds to renovate the property would be deductible. Use of the funds to buy another property or something separate from the rental property would not be deductible.

A rate and term refinance with no cash coming out preserves the tax deductibility of the mortgage interest.

Reference: https://www.rocketmortgage.com...

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Ryan Pulice
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Ryan Pulice
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Replied Nov 25 2022, 12:14

@David Bennett

On a cash out refi, It depends on what the proceeds of the loan are used for. If they are used to acquire new real estate or improve the current property the interest is generally deductible. (Tracing rules will come into play if you are acquiring another rental)

The interest on a rental refi with no cash out is deductible.

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Basit Siddiqi
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Basit Siddiqi
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Replied Nov 26 2022, 14:25

Interest on a loan used to acquire a rental property is tax-deductible.
It gets a little bit more tricky with a refinance if the loan balance increases.

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Cindy Tansin
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Cindy Tansin
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Replied Nov 27 2022, 10:22

Your mortgage interest on the given property is deductible.  If you took the cash out of your primary, it wouldn't be, but any mortgage interest on an investment property is deductible.