Cash out and then delayed financing

6 Replies

I probably should hire a CPA for these questions. But before I spend days to search one, maybe I can get a quick answer here.

Here's my case:

  1. I cash-out refinanced my investment property A and got $100k.
  2. I also have $200k in my saving account, so I purchased investment property B with $300k in cash.

At this stage, AFAIK, the interest of the mortgage on A is deductible because it's used to purchase B. Now, I don't really want to keep the cash in B, I want to get it out. If I do a cash-out refinance on B within 90 days, it would be treated as delayed financing (with some limitations). The cash I get will NOT be used for the next purchase or improvements of my properties. My question is:

  • Is the interest of the mortgage on B deductible?
  • If I get more than $200k out from the delayed financing, can I still claim the $100k from A was used for the purchase of B and thus deduct the interest on A?

    i think the interest from your cash-out on A is already deductible in the first place since it's a mortgage on your investment property (i.e. the fact that you used it to buy another property is irrelevant).  at least that's what our CPA has us do for our cash-out refi'd rental!  so then the same would apply separately to your cash-out refi on B.

    Originally posted by @Annchen Knodt :

    i think the interest from your cash-out on A is already deductible in the first place since it's a mortgage on your investment property (i.e. the fact that you used it to buy another property is irrelevant).  at least that's what our CPA has us do for our cash-out refi'd rental!  so then the same would apply separately to your cash-out refi on B.

    Oh! I didn't know cash-out on A is already deductible. So the requirement that you have to use it for new purchase or improvements of existing house is only applied to primary homes?


    Thanks for the link to previous post as well!  

    @Jessie Xu that has always been my understanding, but now that you've gotten me thinking about this I'm not as sure.  In my case, every cash-out refinance we do goes straight into our business account and gets used to purchase more rentals, so there's little question of whether the interest is deductible and our CPA just puts the mortgage interest with the property it came from for simplicity.  But from the little reading I've done now (this BP blog post is especially helpful), it seems like if you use the proceeds from a cash-out refi on something other than investment properties, they are not actually deductible then.  

    Your situation is more complicated than typical scenarios i've read about , so does seem like a question for a CPA (who has good knowledge of real estate - sounds like plenty of CPAs don't know how to handle this).  I'd think that your interest on A is still deductible, but probably not B (not sure about whether the fact that you're using delayed financing or that you may be essentially pulling out some of the money you'd put in from A will make a difference)

    Originally posted by @Annchen Knodt :

    i think the interest from your cash-out on A is already deductible in the first place since it's a mortgage on your investment property (i.e. the fact that you used it to buy another property is irrelevant).  at least that's what our CPA has us do for our cash-out refi'd rental!  so then the same would apply separately to your cash-out refi on B.

    @jessie xu

    Your CPA is only correct if it was a refinance and it there was no additional cash pulled out and it was just to lower the rate.
    If you pull additional capital out from a refinance, the additional capital must be used to purchase an investment property or a renovation for the added interest to be deductible.