Rental/comm property, cash out loan's interest tax deductible?

3 Replies

I bought a property with all cash at closing, after few months, later after finding the tenant I went for a cash-out refi, and took 90% of my investment (as it appreciated value little bit). Can I show this new mortgage interest as expense? (property closed on LLC)

Originally posted by @Laxman Molugu :

I bought a property with all cash at closing, after few months, later after finding the tenant I went for a cash-out refi, and took 90% of my investment (as it appreciated value little bit). Can I show this new mortgage interest as expense? (property closed on LLC)

 Technically no, you have to trace the interest and deduct the interest at the new activity where you used the proceeds. If you didn't use the proceeds for business or investment purposes and used it per personal expenses, you cannot deduct.  However, talk to you CPA. They might give you practical guidance :). 

@Laxman Molugu - that's the huge upside to real estate investing once you start building a portfolio...and why my plan A is always refi and plan B is sell.  When you sell you get taxed on profits, when you refi you not only don't get taxed, you get to deduct the interest because it's a loan and not profit.  Now what you don't want to do is refi and then use that money for something that doesn't produce money (like a new addition on your primary) because now it's just a loan that's bleeding your bank account every month.  If you use it to buy a cashflowing property now it's a loan that you've used as investment capital.