Tax & Financial Consulting Services
Tax tip: Interest on Refinanced Rental
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I received this question from a G&G subscriber and thought it would be useful to some of you.
Question: Three years ago, I refinanced my rental property, took out $40,000 of equity, and used the $40,000 for personal purposes. Since this loan is secured by my rental property, may I deduct the interest as rental property interest?
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Answer: No! You may not deduct the interest on the $60,000.
The law contains tracing rules that require you to follow the money to its use. In this case, this is personal use. Thus, the $40,000 part of this mortgage is a personal mortgage, producing nondeductible personal interest. Sorry.
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