Cash Out Refi Tax Deductible?

Question

Hi BP Family,

My husband and I are looking to do a cash out refi on our currently paid off home. We plan to use all the funds for investing in rental properties. Would the new mortgage on our home be tax deductible in this case? One of our objectives in this process is to increase our tax deductibles.

Thanks,

Phoebe

Kyle J. · Answer

@Phoebe Pulido  Most likely, yes.  The tax deductibility of the interest has more to do with the use of the loan proceeds, rather than the source.

For example, let's say you were to do a cash out refi on your paid off home (source property "A"), and then use those proceeds to purchase rental property "B".  The interest on that loan would be tax deductible as an expense against rental property "B".  Hopefully that makes sense.

Ashish Acharya · Answer

Yes the interest is deductible at your new property, if 100% of the fund is used.

If you don’t use 100% of the proceeds, then you have to trace the use of the proceeds to the activities it was used and might be personal, non deductible expenses.

Phoebe Pulido · Answer

@Kyle J. @Ashish Acharya Thank you. If I am understanding correctly, since we will use 100% of the funds to invest into rentals, we will be able to deduct 100% of the interest? I want to make sure this is the case before we pull the cash out. Also, is there any benefit to taking this approach vs applying for a loan for a rental property? Say we want to purchase a multiunit for about $500k, if we applied for a loan on this which would benefit us more for tax deductions? If anyone can point me in the direction of a good real estate account who has the time to help us strategize, that would be appreciated.