Cash Out Refinance - Deductible Interest Question

[Allison Hunter]

Hello!

I have an odd ball question about the deductibility of interest on a cash out refinancing.

My family inherited some investment real estate and unfortunately one of the parcels is owned by a pension/benefit plan. In connection with settling the estate, the pension/benefit plan will need to be dissolved and the property will need to be distributed to the beneficiaries. In connection with this distribution, the FMV of the property will need to be treated as income for the beneficiaries in the year of distribution.

While some may question the decision to hold the property instead of selling it to a third-party and rolling the cash into inherited IRAs, we are committed to continuing to own all of the properties for the long-term.  It is also cost prohibitive to continue to maintain the property in a tax deferred vehicle.

We are planning to have a single LLC own all of the properties and my question is - if we do a cash out refinancing in order to fund the taxes associated with the distribution of the investment property, will the interest be deductible?

Thank you in advance!