Hello, my main residence is in Washington State and I own a rental property in Arizona. I’m considering a cash out refinance on my rental property in AZ: will all interests be tax deductible regardless of where I spend the money from the cash out (since it is an investment property)?
If not, would money spent to improve my main residence qualify for interest deduction?
The refi is secured by the rental property itself. 100% of it. So the interest paid on the loan is 100% deductible as a rental business expense. This is not to be confused with a HELOC, where it DOES matter what you do with the money.
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.