Cash Out Refi into a Syndication and Tax Implications

3 Replies

If I do a cash out refi on an investment property and use the funds to invest in a syndication (investing in apartments, mobile homes, storage etc ) is the interest portion of the cash out refinance tax deductible? Is it considered real property? Thanks for any feedback.

Originally posted by @Mark Schumacher :

If I do a cash out refi on an investment property and use the funds to invest in a syndication (investing in apartments, mobile homes, storage etc ) is the interest portion of the cash out refinance tax deductible? Is it considered real property? Thanks for any feedback.

Yes, they will be deductible but subject to passive activity rules and might be suspended. 

Based on IRS Notice 89-35, interest expense generally is treated under the passive loss rules if the business activity of the partnership or S corporation is passive by definition (i.e., rental activities, except for rental real estate activities materially participated in by real estate professionals) or if the taxpayer is treated as not materially participating in the trade or business activities of the partnership or S corporation.

 

To @Ashish Acharya point, if you want to avail yourself of the deduction, consider structuring your participation in the investment as active (via direct acquisition, joint venture or a role in the GP).