Cash-Out Refinance Interest Deduction

[daves27]

For a cash-out refinance on a single family investment property, what amount of interest can I deduct?

And, can I deduct the interest on the cash used to pay real estate property taxes on the same property?

and also paid on a different single family investment property's taxes?

and, what if that property was vacant?

[BettieG]

Hi Daves27!  Great questions!

In short, no.  When you do a cash-out refinance, the rules surrounding deducting the mortgage interest are different than when you have a traditional mortgage.  In essence, in cash-out refinancings, the IRS allows interest deductions only for the amount of the cash-out that was used for capital improvements, renovations, and perhaps mortgage points relating to the property which was refinanced.

So, proceeds of the cash-out which are used to pay real estate taxes (on the original property or another property) wouldn't qualify to deduct the mortgage interest.

See this IRS link for additional information on this subject.

I hope this helps!