Investment Property - Can't Deduct Impacts Nobody Mentions???
Member since 2020 · 78 posts · 15 votes
Investment Property - Can't Deduct Impacts Nobody Mentions???
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@Rocco Swinney This is my understanding...interest you pay on a cash out refi on a rental property does not automatically become deductible simply because the cash out refi was done on a rental. Interest tracing rules apply.
So, for example, you take $100k out of rental Property A and you use that to purchase rental Property B. Then the interest you’d pay on that money would be a tax-deductible expense against rental Property B.
However, let’s say you take $100k out of the same rental property, but you use the proceeds to buy a new sports car and take your family on vacation. That interest would not be deductible (even though it originally came from a rental property), because it wasn’t used to buy or improve your rental properties.
Now, where it gets a little trickier (and what I think you’re asking about), is what happens if you take out money from a rental property but you don’t actually use some/all of it for a long period of time (a year or more) to buy another rental property. You want to know if the interest would be tax-deductible while it’s just sitting in a bank account in the meantime, correct?
If so, it’s my understanding that if/when you ultimately did purchase another rental property, the interest would then be tax-deductible as an expense against that property. However, for the long period of time the money is just sitting in your bank account, the interest you pay would not be tax-deductible.
Here’s a recent article on BP from a CPA that seems to confirm that last part:
https://www.biggerpockets.com/blog/tax-traps-tax-opportunities-refinances
(Read the comments section where someone asks “Is there a time limit if the money from the refi is just sitting in a bank account?” And the author responds “No time limit but just keep in mind that when it is sitting in the bank, the interest is not tax deductible in the interim.”)
Perhaps one of the expert CPA’s or accountants on here will chime in if I said anything that isn’t exactly correct (if they do, take their advice over mine because I’m neither a CPA or an accountant).
Ultimately, the best thing to do would probably be to consult with your own tax professional who is familiar with your unique tax and investing situation.
25 Replies
You can deduct all the interest that you actually pay, your question is a bit confusing so I'm afraid I can't clarify any further because I don't understand the question @Rocco Swinney
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Aaron K.:
You can deduct all the interest that you actually pay, your question is a bit confusing so I'm afraid I can't clarify any further because I don't understand the question @Rocco Swinney
If you do 100k. My understanding its not deductable unless that 100k is used on another investment property? So even if you takeout 100k... you cant deduct any of it until the funds are used for another investment propertys(s)?
I'm still not sure what you mean @Rocco Swinney but if you refinanced a loan for $100k you can deduct all the interest on that loan regardless of what you spend the cash you got from that on.
@Rocco Swinney This is my understanding...interest you pay on a cash out refi on a rental property does not automatically become deductible simply because the cash out refi was done on a rental. Interest tracing rules apply.
So, for example, you take $100k out of rental Property A and you use that to purchase rental Property B. Then the interest you’d pay on that money would be a tax-deductible expense against rental Property B.
However, let’s say you take $100k out of the same rental property, but you use the proceeds to buy a new sports car and take your family on vacation. That interest would not be deductible (even though it originally came from a rental property), because it wasn’t used to buy or improve your rental properties.
Now, where it gets a little trickier (and what I think you’re asking about), is what happens if you take out money from a rental property but you don’t actually use some/all of it for a long period of time (a year or more) to buy another rental property. You want to know if the interest would be tax-deductible while it’s just sitting in a bank account in the meantime, correct?
If so, it’s my understanding that if/when you ultimately did purchase another rental property, the interest would then be tax-deductible as an expense against that property. However, for the long period of time the money is just sitting in your bank account, the interest you pay would not be tax-deductible.
Here’s a recent article on BP from a CPA that seems to confirm that last part:
https://www.biggerpockets.com/blog/tax-traps-tax-opportunities-refinances(Read the comments section where someone asks “Is there a time limit if the money from the refi is just sitting in a bank account?” And the author responds “No time limit but just keep in mind that when it is sitting in the bank, the interest is not tax deductible in the interim.”)
Perhaps one of the expert CPA’s or accountants on here will chime in if I said anything that isn’t exactly correct (if they do, take their advice over mine because I’m neither a CPA or an accountant).
Ultimately, the best thing to do would probably be to consult with your own tax professional who is familiar with your unique tax and investing situation.
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Aaron K.:
I'm still not sure what you mean @Rocco Swinney but if you refinanced a loan for $100k you can deduct all the interest on that loan regardless of what you spend the cash you got from that on.
this is why im confused as it seems some you can and others say no
ex of link - https://www.biggerpockets.com/...
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Kyle J.:
@Rocco Swinney This is my understanding...interest you pay on a cash out refi on a rental property does not automatically become deductible simply because the cash out refi was done on a rental. Interest tracing rules apply.
So, for example, you take $100k out of rental Property A and you use that to purchase rental Property B. Then the interest you’d pay on that money would be a tax-deductible expense against rental Property B.
However, let’s say you take $100k out of the same rental property, but you use the proceeds to buy a new sports car and take your family on vacation. That interest would not be deductible (even though it originally came from a rental property), because it wasn’t used to buy or improve your rental properties.
Now, where it gets a little trickier (and what I think you’re asking about), is what happens if you take out money from a rental property but you don’t actually use some/all of it for a long period of time (a year or more) to buy another rental property. You want to know if the interest would be tax-deductible while it’s just sitting in a bank account in the meantime, correct?
If so, it’s my understanding that if/when you ultimately did purchase another rental property, the interest would then be tax-deductible as an expense against that property. However, for the long period of time the money is just sitting in your bank account, the interest you pay would not be tax-deductible.
Here’s a recent article on BP from a CPA that seems to confirm that last part:
https://www.biggerpockets.com/blog/tax-traps-tax-opportunities-refinances(Read the comments section where someone asks “Is there a time limit if the money from the refi is just sitting in a bank account?” And the author responds “No time limit but just keep in mind that when it is sitting in the bank, the interest is not tax deductible in the interim.”)
Perhaps one of the expert CPA’s or accountants on here will chime in if I said anything that isn’t exactly correct (if they do, take their advice over mine because I’m neither a CPA or an accountant).
Ultimately, the best thing to do would probably be to consult with your own tax professional who is familiar with your unique tax and investing situation.
Thanks so much! That is exactly what i am asking. I get the sense most folks do not realize this too, which hopefully this helps others. I greatly appreciate it, as my concern was not finding enough deals this year (halfway over already) and having the funds sit into next year to use on good deals - Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes6y
You are confused because you are asking 2 different things.
You can deduct all the interest paid on the $50K cash out refi.
the $50K is not the interest. You do not pay this amount to the bank.The interest is on the payment you pay the bank monthly. So look at the mortgage statement that you pay on the new cash out refi and you will see how much is going to the principal and how much is going to the interest.
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
You are confused because you are asking 2 different things.
You can deduct all the interest paid on the $50K cash out refi.
the $50K is not the interest. You do not pay this amount to the bank.The interest is on the payment you pay the bank monthly. So look at the mortgage statement that you pay on the new cash out refi and you will see how much is going to the principal and how much is going to the interest.
Ex. I do a cashout refinance on investment property 1 for 100k in 2020. None of the interest is deductible until all or some of it is used on another investment property
50k of it was then used as a downpayment for investment property 2.
Say i paid 10k in interest for 2020 on property 1. 5k (50%) is deductible from my understanding and not the full 10k since only (50k of the 100k or 50%) was only used so far?0
- Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes6y
@Rocco Swinney
Look at the question you are asking.
In your 1st property that you do a cash out of $50K.
That $50K is now the principle. You can use that cash part of it or all of it whenever and however you want.
But the bank will charge you interest on that $50K.
Maybe each month you might have to pay $250 for using that $50K
That $250 of interest that you are paying the bank is tax deductible.
Does this make more sense?
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
@Rocco Swinney
Look at the question you are asking.
In your 1st property that you do a cash out of $50K.
That $50K is now the principle. You can use that cash part of it or all of it whenever and however you want.
But the bank will charge you interest on that $50K.
Maybe each month you might have to pay $250 for using that $50K
That $250 of interest that you are paying the bank is tax deductible.
Does this make more sense?
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
@Rocco Swinney
Look at the question you are asking.
In your 1st property that you do a cash out of $50K.
That $50K is now the principle. You can use that cash part of it or all of it whenever and however you want.
But the bank will charge you interest on that $50K.
Maybe each month you might have to pay $250 for using that $50K
That $250 of interest that you are paying the bank is tax deductible.
Does this make more sense?
Yes - but my understanding is the 50k has to be used on another investment property to be able to deduct it. So if i used that 50k to buy another investment property - property 2. then i can deduct the $250. if it was used to say buy stock then you cant deduct the $250. If say 25k of it was used to buy an investment property - property 2... then 50% or $125 of the $250 you can deduct
- Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes6y
@Rocco Swinney
No. Any amount of the cash out refi can be used for anything you want.
Home improvement, but a new car, pay off cc bills. Whatever you want.
The amount being tax deductible is not negotiable.
That amount comes from the bank. They will send you a 1099 every on how much interest you paid.
If you have a tax accountant they should be able to tell you the same thing.
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
@Rocco Swinney
No. Any amount of the cash out refi can be used for anything you want.
Home improvement, but a new car, pay off cc bills. Whatever you want.
The amount being tax deductible is not negotiable.
That amount comes from the bank. They will send you a 1099 every on how much interest you paid.
If you have a tax accountant they should be able to tell you the same thing.
appreciate the feedback! Yeah - for this year i think ill have to get one to ensure im doing it correctly. Was just trying to figure out how to best plan this year, if its not the case. As it seems say you cant and others say you can
detailed link - https://www.biggerpockets.com/...
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes6y
@Percy Matsunaga I'm sorry for being blunt...but you are flat out wrong.
@Rocco Swinney you are correct that you cannot deduct the interest used for a non deductible expense like a car, boat ect. I usually don't comment on tax related items because I know it's not my area of expertise. The topic you are looking for, and can find many many discussion on BP about is called "interest tracing". I don't know the specific answer to your question about the interest paid for that long term held money, but another consideration is that the IRS also has guidance on how you allocate that money.
As in if you use a single account and deposit those funds there, and you use that to pay bills ect the guidance could say that the funds were used to pay for non deductible expenses first, and you get no deduction. So it is best for this type scenario to have a separate account to deposit funds from your cash-out.
- Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes6y
No worries for being blunt. But to your point Which area was I being in correct?
Can you expand so I can have the correct info?
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
No worries for being blunt. But to your point Which area was I being in correct?
Can you expand so I can have the correct info?
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
No worries for being blunt. But to your point Which area was I being in correct?
Can you expand so I can have the correct info?
Hi Percy! Hopefully Matt replies, but I greatly appreciate you replying to my post. I think I got it now, which my not be 100% so hopefully others can confirm or respond. Anyways... here goes.
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
No worries for being blunt. But to your point Which area was I being in correct?
Can you expand so I can have the correct in
Hi Percy! Hopefully Matt (thanks for replying to the post) replies. I think I got it now, which hopefully someone can confirm, as im not a 100% sure on this. Anyways hopefully a cpa or someone can add.
Cashout refinance on investment property 1 for 100k. The person pays 10k in interest for 2020 on investment property one
In 2020 the person used 50k of the 100k as a down payment on investment property 2. So because the person used 50% of the 100k from investment property 1... it sounds the person can then deduct 50% of the 10k or 5k and not the full 10k. As this 50k was not used on things unrelated to rentals - ex. car, stocks, etc.
Then say in 2021 the person uses the other 50k as a downpayment on investment 3. The persons interest for 2021 on investment property 1 was say about 10k again. So because of this it sounds then the full 100% of the 10k can be deducted this year and going forward
The unkowns I still have is the below:
1. It sounds like the funds do not have to be used in a needed timeframe (ex. that same year) , but hoping to confirm
2. Does paying down the principal of another investment property still count and can be deductible. Ex. 50k used on investment property 2 and 45k used on investment property 3. Have 5k left... can i simply pay down say investment property 1 or 2.
- Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes6y
@Rocco Swinney
I think you are getting it too. But I think you will get it more if you actually apply for the cash out refi.
The bank who will approve you will be able to let you know more about what your monthly mortgage payment will be.
Road blocks that you might incur
1 - cash out refi... the bank will lend you approx 75% of the potential equity of the property.
You need to start a conversation with a lender about that amount
2 - as soon as you cash out a XX amount the following month you will have a monthly mortgage of previous mortgage + cash out refi amount.
You should ask the lender what that amount will be so you can be prepared for the monthly payment.
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Percy Matsunaga:
@Rocco Swinney
I think you are getting it too. But I think you will get it more if you actually apply for the cash out refi.
The bank who will approve you will be able to let you know more about what your monthly mortgage payment will be.
Road blocks that you might incur
1 - cash out refi... the bank will lend you approx 75% of the potential equity of the property.
You need to start a conversation with a lender about that amount
2 - as soon as you cash out a XX amount the following month you will have a monthly mortgage of previous mortgage + cash out refi amount.
You should ask the lender what that amount will be so you can be prepared for the monthly payment.
I got that part down at least :-). Im closing on an investment property in 4 days. Then im using the same lender to refi cashout a different investment property shortly after, which we went over the numbers from a mortgage, likely total, etc. At least now from this post.. i need to have a better game plan in terms of how i will need to apply those funds to ensure its deducted and properly calculated. It would be nice to use it all up this year on good deals, but i doubt since the year is more than halfway already. Appreciate your replies throughout
@Rocco Swinney If you are not going to use 100% of the proceeds from the cash out refi, I suggest you deposit the funds to a separate bank account. This will make it easier for you and your accountant to trace the use of funds later on and figure out which interest is deductible and which is not. The tracing rule gets more complicated if you commingle the cash out funds with unborrowed funds.
- Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Dan V.:
@Rocco Swinney If you are not going to use 100% of the proceeds from the cash out refi, I suggest you deposit the funds to a separate bank account. This will make it easier for you and your accountant to trace the use of funds later on and figure out which interest is deductible and which is not. The tracing rule gets more complicated if you commingle the cash out funds with unborrowed funds.
Thanks Dan! Are you aware of a needed timeframe one would have to use those funds? ex. cashout in 2020. Use half of it in 2020 on another property. Then say in 2026 (any cuttoff?) use the other half on a different property
- 6yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Originally posted by @Percy Matsunaga:
@Rocco Swinney
No. Any amount of the cash out refi can be used for anything you want.
Home improvement, but a new car, pay off cc bills. Whatever you want.
The amount being tax deductible is not negotiable.
That amount comes from the bank. They will send you a 1099 every on how much interest you paid.
If you have a tax accountant they should be able to tell you the same thing.
Percy, don't give incorrect advice please. Just because you get a form 1098 from the bank telling you how much interest you paid means that it is deductible. It just tells you how much interest you paid. The interest may be deductible - it depends on everyone's unique situation.
Basit Siddiqi CPA4.979 Reviews - Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes6y
Basit, The info I have was correct from my tax status. I was able to deduct all the interests that I have paid in a certain year.
Obviously, I’m not an tax accountant and of course Rocco should always refer back to his own situation and his own tax accountant.
But, generally speaking those interests should be tax deductible. Up to what amount can be verified by his tax accountant. - Member since 2020 · 78 posts · 15 votes6y
Originally posted by @Basit Siddiqi:
Originally posted by @Percy Matsunaga:
@Rocco Swinney
No. Any amount of the cash out refi can be used for anything you want.
Home improvement, but a new car, pay off cc bills. Whatever you want.
The amount being tax deductible is not negotiable.
That amount comes from the bank. They will send you a 1099 every on how much interest you paid.
If you have a tax accountant they should be able to tell you the same thing.
Percy, don't give incorrect advice please. Just because you get a form 1098 from the bank telling you how much interest you paid means that it is deductible. It just tells you how much interest you paid. The interest may be deductible - it depends on everyone's unique situation.
hi basit! hope allis well! The one piece i am unclear on is... i understand if for example i used 50k cashout refi on my rental to buy another rental then i can deduct the interest from the full 50k. However, say from my current rentals i have about 50k yearly in property taxes, repairs, insurance, etc for them. if the 50k was used to cover the expenses on my other current rentals is that still deductible?
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