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Mortgage loan

I did cash-out refinance on our main home to buy a rental property.  We paid off the loan for our main home and used the rest of money to buy a rental property.  How would I calculate our interest amount to deduct for our property expense?   The paid off was about $150,000 and we used about $500,000 (The refinance loan amount is $650,000) to buy a property and also took $50,000 out of our saving.  

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3 Replies
JotikaT2
Employee Tax Expert

Mortgage loan

For the loan that was paid off, if it was paid off in 2023 with the refinance, depending upon what month that happened in, you should have received a Form 1098, Mortgage Interest Statement.  The mortgage interest (and property taxes if you impounded this with your loan) on this form would be reported as part of your deductions and credits and would only be deductible if your overall itemized deductions exceed your standard deductions.  Please see this link for guidance on how to enter this information in your return.

 

In regards to your refinance, it doesn't sound like it was an actual refinance since the proceeds were not for the same property but were for another rental property.  A refinance would have been used to pay off your old loan and then used to finance the same property with different loan terms.  

 

In regards to the new loan, if it was used to purchase a new rental property, please see this FAQ as you may be able to deduct more expenses than you would for your personal residence.  The interest that is deductible will depend upon the terms agreed to when you signed the forms for the new loan.  I recommend either contacting the agencies you are making your payments to as they should have also issued you a 1098 form.  Any mortgage interest paid on the loan for the rental property will be deductible on Schedule E and included in your overall tax calculations.

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Mortgage loan

Your refinance is secured by your main home.

However you did not use the proceeds to buy, build or improve your main home.

The interest is not deductible on schedule A Line 8

 

@kaoichmizyuki 

Mortgage loan

This is a case where you can't have it both ways.  You can treat this as a personal mortgage, in which case you can deduct 23.1% of the interest on schedule A as a personal mortgage, and not deduct the rest as a rental expense.  Or, you can deduct 76.9% of the loan as a rental expense on schedule E, and not deduct the rest on schedule A.  (500,000 ÷ 650,000 = 76.9%.)

 

Also, to deduct the loan as a rental expense (because the loan is not secured by the rental property), you must be able to prove to the IRS, what part of the interest expense is directly traceable to the rental property.   It sounds like you can do that pretty easily for now, since you took one loan and used it for two specific and traceable purposes.  But if you start using the refinance money for other expenses, or if you refinance again and things get mixed up or complicated, the IRS can deny the deduction if you get things so mixed up and complicated that you can't trace the interest back to the rental property. 

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