Borrowing money in one state and buying in another

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I have a rental property in California that does not have a mortgage on it. I would like to take out a mortgage on it in California and buy a multifamily in Massachusetts. The advantages are that I can get a better rate in California since it is a single family not in an LLC and the property in Massachusetts would be in an LLC.

  My question is: Can I deduct the interest expense in California (11% tax) where the house is while using the money in Massachusetts?  The difference in interest rates and tax rates (11 vs 6%) would save me about $10k a year.

You will trace the loan proceeds to determine interest deductiblity.

If the loan proceeds go the MA rental, the interest will be deducted against the MA rental's taxable income, not the CA rental.

You generally would get a tax credit in your home state for taxes paid in another state -- however if taxes are higher in CA you'll still end up paying the higher rate.  It just means you won't be double taxed at the state level.