i believe interest tracing rules apply to the interest on the cash-out portion of your refinance. If the cash-out money was used to buy a new rental property, the interest is a rental expense for the new property and not for the property you refinanced. If the cash-out money was used to improve your primary residence, then the interest would be a Schedule A deduction for home mortgage interest, but only if you itemize. If the cash-out money was used for some personal purchase (vacation, new car, pay off credi cards, etc) or just put in the bank to collect interest, then the loan interest on that money is a personal expense and not deductible. The portion of the new loan that refinanced the original acquisition debt on the refinanced property is still an interest expense for that property. Does not matter whether the loan is a cash-out refinance or a home-equity loan.
Just how I see it. Consult your own tax professional for specific guidance appropriate to your circumstances.
