My accountant recently informed me that once a property is owned free and clear and a new mortgage is taken out the interest is no longer tax deductible. Is this true? This is my owner occupied home and I am looking to pull some cash out for other REI ventures but am worried about doing anything the IRS might deem unappropriate. The property is currently held in a trust…is there any way, creative or not, to get my $$$ out, get my deduction, and keep the IRS happy? Help…
For your primary residence, I have always heard that you can take a home mortgage interest deduction on Schedule A for the first $100K of a home equity loan. Assume that the same limits apply to a cash out refinance.
That said, however, if the money is used to acquire investments, the interest paid should be tracked to the investment. For example, if you use your loan proceeds to purchase a rental property, you deduct the mortgage interest on Schedule E because the interest tracks with the investment.
If you use all the loan proceeds to purchase a rental property, then all of the mortgage interest would be expensed on Schedule E, and not on Schedule A. Perhaps this is the situation your accountant had in mind.