Deducting interest on cash out deal

[David V.]

I think I may have made a big rookie mistake. I recently purchased an investment property (a rental) for cash with the expectation of doing a cash out shortly thereafter. Couple months later I did the cash out. I assumed that I could deduct the expense on the cash out just like I could if I purchased with financing. However, I have read in a few places that I cannot deduct the interest in thus unless the loan was used for improvements. As such, I think I am out thousands of dollars on interest expense deductions. Is this true?

Thanks

[David Beard]

There is a rigid sense of looking at the IRS "tracing rules" which suggests that you can't deduct the interest against that particular property. However, I'd suggest a few things:

1) 99% of investors would deduct it and not worry about it, as long as there is a mortgage against that property. I find it difficult to believe that an IRS auditor would look deeper.

2) A refi done very shortly after purchase can be viewed as a "delayed financing" situation. In fact, Fannie Mae makes a loan just for this purpose in cases where the refi is done within 6 mths of purchase.

3) Will you be using the proceeds to purchase another property? If so, then it can arguably be "traced" as the funding source for the new property.

[David V.]

hello, thanks for the comments. No - I did not use the proceeds to buy an additional property, However , I just read in IRS pub 936 that I may have a 90 day window to get financing after a cash purchase and still be able to deduct interest. I believe this is for non rentals but I would think it would apply to rentals, Hopefully one of the tax gurus in this forum will be able to shed more light on this. Thanks again for the feedback. I just recently joined this site and I am loving the wealth of information and the willingness of people like you to assist me and others on various issues.

[Steven Hamilton II]

Originally posted by @David V.:

hello, thanks for the comments. No - I did not use the proceeds to buy an additional property, However , I just read in IRS pub 936 that I may have a 90 day window to get financing after a cash purchase and still be able to deduct interest. I believe this is for non rentals but I would think it would apply to rentals, Hopefully one of the tax gurus in this forum will be able to shed more light on this. Thanks again for the feedback. I just recently joined this site and I am loving the wealth of information and the willingness of people like you to assist me and others on various issues.

David,

If you can prove that was your original intention to obtain a loan on the property.