@Andreas2
1) On schedule A, you can only deduction mortgage interest related to the balance of the prior mortgage with no cash out.
2) On schedule E, yuou can deduct the interest related to the invest property.
3) it is possible SOME of the interest is not tax deductible at all./
You question poses 3 possible outcomes, but there is a 4th, which is more likely than the 3 you asked about.
Let's say your existing mortgage balance was $200,000 and you cash-out refinanced $300.,000. Then you invested $55,000 to purchase an investment property.
1) The interest rate times the $200,000 is deductib;e on Schedule A.
2)The intest rate times the $55,000 is deductib;e on Schedule E
3) The remaining interest is not tax deductibe.
As the mortgage amortizes over time, item 3 amortizes first (meaning the balance of #1 and #2 will not change for many years. Once the loan amortizes down to $255,000, the mortgage (and the related interest) of #2 amortizes. Once tbe mortgage is below $200,000, all the interest goes on Schedule A.
If you later sell the invest property, only the interest related to the $200,000 is tax deductible. The rest is not (unless of course you invested in annother property)
