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.
Can I 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 will keep the money from cash-out refi in a separate checking account, and use the money from the checking account to buy the rental property, so that I can clearly show that the money was indeed used to buy the rental.
I have heard opinions that says both yes and no to the above questions, and Google search could not provide a definitive answer.
Yes you can. If you do further Google research, look up "tracing rules".
However, I vaguely recall there MIGHT be a time limit to use the funds ( I would need to look that up though). If that is the case, you shouldn't do the refinance until you are actually in the process of buying the rental.
Yes you can. If you do further Google research, look up "tracing rules".
However, I vaguely recall there MIGHT be a time limit to use the funds ( I would need to look that up though). If that is the case, you shouldn't do the refinance until you are actually in the process of buying the rental.
As I recall, you will have 60 days from the closing date of the refinance, to close on the purchase of the rental. Then using the tracing rules you'll be able to claim the mortgage interest against the rental.
So keep all paperwork associated with *everything* on this, and keep it forever in case you're ever audited on it. Three rules to keep in mind when dealing with the IRS on these matters.\
1) You are guilty until proven innocent.
2) The burden of proof is on the accused (that would be you!) and not the accuser.
3) If it's not in writing, then it *did* *not* *occur* and you lose.
Thanks, it's really awesome that I got two excellent and to-the-point replies within so short time span!!
A follow-up question: when I enter rental information on Turbo tax, there is an option for entering "Mortgage Interest" and "Other interest." The mortgage interest that I pay on the refinance (the principal of which I used to pay for the rental property) - do I enter it as mortgage interest, or as other interest? Sole reason I am asking this is because the mortgage interest is not secured on the rental property, but secured on my primary residence.
@ayanep , any conclusion on "Mortgage Interest" and "Other interest."
I am in a similar situation. So .. any clarification on this will be really helpful.
A 1098 is issued for the mortgage interest so that is what it is reported as.
As per my understanding, 1098 will be reported on the primary residence. But, we want to report the
interest on the cash-out (used to purchase the rental) as interest on the rental (Schedule E )