wasatch range · Member since 2018 · 2 posts · 4 votes
Hello fellow investors
I’m not sure if this is the right idea or not. so I’m hoping I can borrow from your experience/knowledge.
I have 5 rental properties and in most of them I have an equity of more than 35%. My question is, if we take a cash out refinance from one property and pay off a second property; by virtue of interest tracing rules is the interest deductible on the second property.
The reason I want to do this is because it improves on the title/closing costs for the one property while still leveraging the highest value property. This will also give the maximum possible money at a lower rate and refi the same property again if interest rates drop substantially. For reference the higher value property is in California and the rest of the properties are in Texas & Utah.
If you take a cash-out refinance from one rental property and use that money to pay off another rental property’s mortgage, the IRS looks at how you use the loan. Since the money is still tied to your rental business (paying off another rental), the interest on the new loan would usually be deductible as a rental expense. This means you can likely deduct the interest on your taxes because the loan is connected to your investment properties.
When you do a cash-out refinance on one rental property to pay off the mortgage on another, the interest tracing rules generally allow the interest to be deductible if the loan proceeds are used for business purposes, like paying off another rental. So, if you use the refinanced funds from the higher-value California property to pay off the mortgage on a Texas or Utah rental, the interest on the new loan should still be deductible because the funds are being used for your rental business.
If you take a cash-out refinance from one rental property and use that money to pay off another rental property’s mortgage, the IRS looks at how you use the loan. Since the money is still tied to your rental business (paying off another rental), the interest on the new loan would usually be deductible as a rental expense. This means you can likely deduct the interest on your taxes because the loan is connected to your investment properties.