Writing off interest paid on refi loan above original investment

2 Replies

Let's say you have a property paid in full with a original cost basis of $1.2M and it is worth $2.2M and would like to do cash out financing at 70% LTV which would be $1.54M which leaves an amount of $340,000 above original investment. The question is, is the interest paid on that amount tax deductible going forward or must you split up the interest paid on loan between original amount invested and the equity taken out ?

Thanks for your help.

Originally posted by @Jonathan St.Leger :

Let's say you have a property paid in full with a original cost basis of $1.2M and it is worth $2.2M and would like to do cash out financing at 70% LTV which would be $1.54M which leaves an amount of $340,000 above original investment. The question is, is the interest paid on that amount tax deductible going forward or must you split up the interest paid on loan between original amount invested and the equity taken out ?

Thanks for your help.

Jonathan, 

Even the interest on the original investment amount is non-deductible at this property level. You have to trace the interest to a new activity. 

- If you use the proceeds for personal purposes, non of the internet is deductible 

- If you use for business/investment purpose, all the interest might be deductible. There are some other rules such as investment interest expenses. Basically, trace the interest to the new activity. 

@Ashish Acharya

Thank you for responding!

Forgive me but I'm confused, let me give a little more info just for clarification. It is a new build from ground up 7 townhome development that I just completed which I paid for along the way. I did a crazy amount of the work myself and was planning on essentially doing a BRRRR and pulling out the initial capital back out and had been thinking about pulling out some the equity created. Why would I not be able to write off interest paid on cash out ? How does it work on a traditional BRRRR ? I do want put the capital to work on another project which will require a additional loan but it seems like I should be able to write off interest on both no?

So are you saying if I had taken out a loan to build this project and then it went into a regular commercial loan a could write interest off but because I put in capital, blood sweat and tears and paid outta pocket and then went for loan I could not write off interest paid?

Thank you for your help, I appreciate it! Have a great day!

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