Tax implications of cash out refi to buy investment property

12 Replies

Thank you in advance for taking the time to read and/or answer my question.  I appreciate your time.  I'm, not sure how to pose this question either but here goes...

I recently used a cash-out refi to purchase a SFR rental property for 100% cash but I am now wondering if it would have wiser to buy it using a traditional mortgage from a tax perspective. Will I file a Schedule E for this property and get benefits like depreciation?

@Frank Wells Due to debt tracing rules, the interest is deductible on your schedule e for your new property. A traditional mortgage wouldn't have made a difference relating to the deductibility of your interest expense. Since the debt is being used for your new property, this is where the interest expense is "traced" to. Hope this helps!

@Taylor Brugna could you go into more detail?

Being the BRRR strategy is common on here with myself included I want to understand you correctly. You are saying the mortgage interest paid should not be treated as an expense to the same property that mortgage is tied to if a cash out refi has been done?

Example house A bought for $100 cash. Fixed up and then $150 mortgage is placed on it and I buy house B for $100 cash. At tax time I write off mortgage interest on house B that has no mortgage on it?

I am not a CPA, but that's not how I'm been instructed to do it nor how I do it. I was under the impression house A has debt, house A gets a write off.

Please elaborate. Thanks

@Josh C. , sure thing.  The main question to ask is: What is the debt being used for? 

Let's say you have a primary residence and take a 100k heloc on it to buy a rental property. You wouldn't take the interest on schedule a (for your primary), you would take the interest on schedule e for the new rental property. What if you refinanced a rental and then used the proceeds to pay off your primary mortgage?That wouldn't be a rental deduction.

What's important where the debt proceeds are actually going. I can't go refinance a rental, buy a fancy sports car and call it rental interest.

Does that make more sense? 

@Taylor Brugna if you used a HELOC for the down payment on a rental property, can you deduct the HELOC interest along with the traditional mortgage interest? If so, do you record the HELOC interest in "other expenses" on schedule E or combine them on "mortgage interest" section?

@Michael Bertsch Yes, you can. You can put them both on the mortgage interest paid to banks line. Interest wouldn't go in other expenses, it would be either Mortgage Int Paid to Banks or Other Interest. I use the other interest line for private lenders, etc. 

Hope this helps!

@Taylor Brugna can the cost of a cell phone be deducted using the de minimis safe harbor? Not the monthly bill but the actual cost of the device. I bought one a few months ago and it was about $800. I don't wanna have to depreciate it for 5-7 years. From what I understand, it's no listed property so I do not have to keep track of personal/business use.

@Taylor Brugna good deal! Now, is the cell phone monthly bill deductible? If so, is it a certain percentage?

Also, can I take a home office deduction if I am already taking a paper loss on my schedule e?

BTW, I really appreciate your feedback. It has been very helpful.

@Michael Bertsch 1) You need to come up with a reasonable percentage that is business use and take that portion of your monthly bill as a deduction

2) Yes, it is a valid deduction just like any other deduction, regardless if you are already showing a loss. There are two different ways to take the home office deduction, choose wisely!

Hope this helps

@Taylor Brugna your the man. I will probably use the simplified method for the home office.

I will be taking a casualty loss on one of my rentals this year. We had a bad storm come through. It cost around $4k to replace and I paid $2800 out of pocket that was not covered by the claim. So, can I deduct the whole $2800 this year? If so, does the basis on my property stay this same or does it need to be reduced by a certain amount?

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