Rental Refinance Tax deduction

Dear All:

I have been bothered with question for a while, and would appreciate any advise. I own a rental property (mortgaged) with some equity (~40K) in it. When I file taxes, I use the interest paid on the mortgaged loan for the rental propety to subtract from the rental income. This helps deduct the rental expenses to reduce the income tax liability due to teh rental income. Now, I need some funds to pay off some personal loans and am planning on refinancing the rental property loan to an higher amount (reduce equity) but use the recovered difference to go from a lower loan amount to a higher loan amount and pay-off some personal loans with that difference. Here is the question:

- If the rental loan is refinanced, it is legitimate/legal to use the greater interest paid on the new loan and deduct it as a rental expense?

- Can the points and closing cost paid for the refinanced loan be deducted as an expense on the rental property?

Thank you very much for your feedback in this regard.

Olivia

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Reply to
olivia.carmichael
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No, that interest becomes personal, not related to teh rental property, and not deductible.

Not if the loan proceeds are used for personal purposes.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Reply to
Paul Thomas, CPA

Just last week I counseled a client who told me his intentions were to "cash out" some equity in his rental property.

No. You must prorate the interest according to the relationship between the pay off figure and the total refinanced.

Same answer as above. Only a percentage of those points and closing costs will pertain to the rental property. Any balance of both interest and points and closing costs will be personal in nature and NOT deductible. Nowhere. Nohow. To illustrate, if payoff if 50,000 and you refinance for

75,000, then your percentage is 66 2/3% and you can deduct that percentage of interest and other items on schedule e. ChEAr$, Harlan Lunsford, EA n LA
Reply to
Harlan Lunsford

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