Cash Out Paid For Rental to Get Downpayment for Another Rental

[Diane Tycangco]

Hello, I am thinking of getting equity out of a paid-for rental and use it as a downpayment for another rental.  Someone told me that when you do not use the loan to buy, improve the property you borrowed money from, you cannot deduct the interest you paid.  Is this true?  What is the solution to this problem?

Of course, the mortgage interest on the 2nd rental is fully deductible as expense, right?

Thank you!

[Michael Plaks]

Quote from @Diane Tycangco:

Hello, I am thinking of getting equity out of a paid-for rental and use it as a downpayment for another rental.  Someone told me that when you do not use the loan to buy, improve the property you borrowed money from, you cannot deduct the interest you paid.  Is this true?  What is the solution to this problem?

Of course, the mortgage interest on the 2nd rental is fully deductible as expense, right?

Thank you!

Both statements are correct in their respective context. The "not deductible" part is correct when you borrow against your personal residence and use the money for non-business purposes.

In your case, the interest will be deductible, but against your 2nd rental, not against your 1st rental. You need to be careful to separate the money and be able to show that the loan proceeds were used specifically for the purchase of the 2nd rental.