Cash out refinance

[avirak]

If I do a cash out refinance against my primary house (let's say $200K), can I expense the interest against  a rental property that its value is over $200K and it is fully paid (instead of deducting the interest from my personal tax)?

[Vanessa]

Are you using the cash out entirely to purchase a rental property?

[Opus 17]

You need to be able to trace the proceeds of the loan directly to the purchase of or renovations to the rental property.  If audited, the IRS will want to see that you used the loan proceeds to buy or renovate a rental property, that would allow the interest to be treated as a rental expense.  If you use the loan for other purposes, you must allocate the interest to the rental expense and personal expenses and only deduct the rental expense.  The harder it is to exactly trace the loan proceeds to a legitimate rental expense, the more likely the deduction will be disallowed if audited.

If you already own both your home and the rental free and clear, then borrowing against your home and calling it a "rental expense" to try and get it to be deductible, is fraud, pure and simple.