Mortgage Interest Deduction for cash out refi on existing rental property

Forum|Forum|3 years ago
May 19, 2023
1 reply
32 views

While the rules for deducting interest on a cash out refi on rental property are usually straightforward, I had a (probably simple) question

With TCJA, I know you can't deduct the interest if the loan proceeds weren’t used to buy, build or improve property. So, you can’t claim a tax deduction if the proceeds were used to pay for personal expenses like high-interest debt, medical bills, etc. However, what if they are using proceeds to pay off a line of credit and that line of credit had been used to help buy a different house is that still deductible?

Similarly, if they refi rental property to directly fund improvement of their primary residence, is that deductible? That is, the refi proceeds don't have to go into the house that was refinanced.

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Best answer by TaxGuyBill

Mortgage interest based on the amount of the loan that was spent for the rental goes on Schedule E. Mortgage interest based on the amount of the loan that was spent for a personal home or other personal use is not deductible anywhere.

T

TaxGuyBill

Level 15

@KJM14 wrote:

However, what if they are using proceeds to pay off a line of credit and that line of credit had been used to help buy a different house is that still deductible?

Similarly, if they refi rental property to directly fund improvement of their primary residence, is that deductible? That is, the refi proceeds don't have to go into the house that was refinanced.

Personal mortgage interest is only deductible if it is buy, build or improve your personal residence AND it "is secured by such residence".

That means a mortgage secured against a rental property does not qualify to deduct any personal mortgage interest.

If both houses are personal-use residences, some people may read it as you can mortgage one to buy or improve the other, but I think that most people read it as that it must be secured against THAT home.

K

KJM14Author

Level 3

thanks for the reply. for my clarity, that means that they wouldn't deduct the mort int for the rental prop as an expense on sch E (as opposed to deduction on Sch A)?

T

TaxGuyBillAnswer

Level 15

Mortgage interest based on the amount of the loan that was spent for the rental goes on Schedule E. Mortgage interest based on the amount of the loan that was spent for a personal home or other personal use is not deductible anywhere.

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