Hi, I have zero mortgage balance on my ~$750k worth primary residence. I am planning to do a cash-out refinance of ~300k on my primary residence, and use the entire money to purchase a rental/investment property. I understand that I can deduct the mortgage interest of the cash-out refinance loan on the Schedule E form, and use the mortgage interest against the rental income - i.e., if I follow the "tracing rules" to trace the flow of money from the cash-out re-fi to buy the rental property. I also understand that I need to buy the rental property within a few days of the cash-out re-fi, and make sure not to commingle the money with other personal funds (i.e., use a separate checking account).
My question is, when I file tax, do I need to submit documents showing tracing of the money? Do I add any statement, saying that I used cash-out re-fi money from my primary residence to buy the rental? Or do I simply use Turb-tax to file my returns, and in case I get audited I submit the documents to the IRS?
Also, when I use TurboTax to file returns, there is a question in the rental expenditure section that asks if/how much I paid in mortgage interest for loan for the rental property. There I provide the cash-out re-fi interest on my primary residence, right? Any suggestion on how I actually provide the cash-out re-fi information while filing taxes would be really helpful.
Thanks a bunch!
Let me try to re-phrase my question, since there isn't an option to edit my earlier post:
I have zero mortgage balance on my worth primary residence, and doing a cash-out refinance on my primary residence, and use the entire money to purchase a rental property. Assuming I keep track of tracing the funds from the cash-out re-fi for purchasing the rental property, I understand that I can deduct the interest on the cash-out re-fi against the rental income in form Schedule E. My question is, in Schedule E, do I show the interest of the cash-out re-fi in line 12 of Schedule E (Mortgage interest paid to banks) or in line 13 (other interest)?