I did a cash-out refinance for a rental property in 2021. The cash, which was meant as a down payment for another property that fell through, has just been sitting in the bank. From my understanding, with a cash-out refi, only the mortgage interest paid on the original loan amount (prior to the refi) can be considered as a business expense for that rental property, unless the cash-out amount is used to improve the property securing the loan.
How does one go about calculating this percentage? For simplicity, suppose the remaining original principal loan is 200K. With a refinance in June 2021, the new principal amount is 300K, so there is a 100K cash-out. Would the applicable mortgage interest deduction equate to:
(100K / 300K) * (Mortgage Interest Paid since June 2021)
In addition, will the mortgage interest prior to the refi (before June 2021) be wholly applicable as it was paid on the original 200K loan? So the total would be:
(100K / 300K) * (Mortgage Interest Paid since June 2021) (Mortgage Interest Paid before June 2021)
Turbotax does not seem to account for this scenario in the interview questions.
Thank you in advance.
