I did a cashout refi of our primary house, and took out 600K cash to pay off a high rate loan for an investment property . Can the interests paid for that 600K being deducted from the rental income of that investment property?
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Maybe. It depends on how closely you can trace the loan proceeds to the investment. If audited, the IRS will want you to prove that the interest expense you are deducting as an investment expense is directly traceable to the investment property/income. The more you mix things together and combine them, the more at risk you are in an audit. For example, you should not use part of the loan for the investment property and part for your personal home, or for personal bills, or a vacation.
I have a similar question. I refinance my primary home mortgage to pull cash out to pay off a rental loan at a higher rate. My primary was about $500 and I refi for $627. I don't think I can deduct as interest on my primary house. Can this $127,000 be treated as interest deduction for my rental property even though the security is my home ? Do I use 500/627 % as the primary interest and 127/627 as the rental. Do I need to be able to trace the transactions ?
See "mixed-use mortgages" in publication 936. It tells you that home equity portion of the loan is paid off before home acquisition debt.
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