Tax implications for cash-out refi of an investment property

[Christian Flanders]

Hello!

I am planning to do a cash out-refinance from my investment property to fund the down payment on a primary residence. Will the interest I pay on the refi be tax deductible since it is being used to purchase a primary residence? Thank you!

[Carini Rochester]

I doesn't matter what the money is used for. What matters is that the loan is on an investment property, so the interest you pay on that is an expense against that property.

[Ashish Acharya]

Originally posted by @Carini Rochester:

I doesn't matter what the money is used for. What matters is that the loan is on an investment property, so the interest you pay on that is an expense against that property.

Not correct!

[Ashish Acharya]

Originally posted by @Christian Flanders:

Hello!

I am planning to do a cash out-refinance from my investment property to fund the down payment on a primary residence. Will the interest I pay on the refi be tax deductible since it is being used to purchase a primary residence? Thank you!

No, it will not be deductible. If you use proceed for business/investment use, it will be. 

[Natalie Kolodij]

Quote from @Carini Rochester:

I doesn't matter what the money is used for. What matters is that the loan is on an investment property, so the interest you pay on that is an expense against that property.

That's not how the deductibility of interest works. It's not based on the asset borrowed against/securing it- it's based on the use of funds. Funds withdrawn against a business asset but used for personal use are not deducitble.

[Carini Rochester]

Sorry for thinking that through incorrectly. Thanks to the accountants.

I would see this as the real estate business getting a loan that the real estate business will pay back (principle and interest) (through the rent proceeds.) If the money is used personally, that would be a taxable (personal income tax) draw on the real estate business. I (personally) didn't take out the loan. I (personally) don't pay the loan back.

I hope this doesn't get too far off @Christian Flanders 's question. I'd appreciate comments and helpful insight from the accountants. Thank you. @Ashish Acharya @Natalie Kolodij

@Natalie Kolodij

[Joe Splitrock]

Quote from @Carini Rochester:

Sorry for thinking that through incorrectly. Thanks to the accountants.

I would see this as the real estate business getting a loan that the real estate business will pay back (principle and interest) (through the rent proceeds.) If the money is used personally, that would be a taxable (personal income tax) draw on the real estate business. I (personally) didn't take out the loan. I (personally) don't pay the loan back.

I hope this doesn't get too far off @Christian Flanders 's question. I'd appreciate comments and helpful insight from the accountants. Thank you. @Ashish Acharya @Natalie Kolodij

@Natalie Kolodij

 Sorry but this isn't correct either. Deductibility of interest follows use. If you use the money for personal use, the interest is not deductible. The money you take out is not subject to personal income tax as income. All you are doing is taking out a personal loan and using the rental property to secure the loan. 

More simply put, whether a loan is a business loan or personal loan is based on USE. It is not based on where the money comes to pay back the loan or what it is secured against.

[Carini Rochester]

@Joe Splitrock Thanks for the explanation. That's very clear.

[Cody Baldwin]

@Ashish Acharya for investment properties are you able to deduct the loan interest payments? Or would you only get the depreciation as a write off? I thought that loan interest was only a deduction for primary residence? 

For context not currently a real estate investor but looking at my first properties right now.

[Christian Flanders]

Thank you! That's what I suspected but wanted to make sure.