Cash out refinance and investment property

No. Taking out a loan doesn't affect your taxes. (The payment of interest on the loan may be deductible, and the cancellation of debt should you not pay it back may be taxable.)

Yes.

Mortgage insurance is deductible as investment expense if you make sure the money you get from the loan is easily tracked to its use for the purchase of the investment property. That would also make the interest on the loan investment interest (rather than mortgage/home loan interest), with different tax consequences.

No. The interest rates are unlikely to be equal. Under some circumstances, especially if the usage of the borrowed money isn't tracked, the tax consequences will also be different.

If you can arrange financing in advance, your ability to close should still be better than your competitors who have to offer conditional on obtaining financing.

You can also take out the home loan _and_ arrange financing; at closing, the seller doesn't care where the certified check comes from, so pay with the financing and repay the home loan.

Seth

Assumption: you have never refinanced your home and rolled other debt into or taken cash out and you have no home equity line.

It depends. The interest on the additional debt on your residence is not deductible as residence interest on debt in excess of $100,000. The interest on the first $100,000 of additional debt is not deductible for alternative minimum tax (AMT). The interest on the excess may be deductible against the investment if you can trace the proceeds as required by the regulations.

There may be a way around this if you elect to treat the mortgage on your primary residence as not being on your primary residence but then you lose the Schedule A deduction on the interest on the existing loan balance. Although there are those who argue that you can bifurcate the new loan and only treat part as not being secured by your residence.

As I read my response, I realize this forum is not the best way to discuss your options. I recommend you call your tax advisor, the money will be well spent.

Only in rare circumstances. For example, if you are not subject to AMT and you do not borrow more than $100,000 extra. Even then the interplay of the phasing in and out of various credits and decutions could make option 1 a poor tax choice.

Arrange the financing on the investment property up front is the easiest and best option.

Drew Edmundson, CPA Cary, NC

Assuming this is a schedule E-type property, I believe that if you pay cash for the investment property, and then refinance the investment property within a certain period of time, then the mortgage is considered acquisition debt and the interest is deductible on schedule E. I don't remember how long.

Also, my understanding is that any non-mortgage interest spent on the investment property can be deducted on schedule E as an "other interest" expense.

If you want to get a mortgage on the investment property at some point you should investigate the availability of financing up-front. It can be quite difficult these days to get financing - there are a lot of new rules about reserves etc, and appraisals have become a real PITA. Especially if you are in an area with a lot of distressed properties - many banks won't do these mortgages at all any more.