Cash out refi from one property to pay off a second property

[Ujwal Kolli]

Hello fellow investors

I’m not sure if this is the right idea or not. so I’m hoping I can borrow from your experience/knowledge.

I have 5 rental properties and in most of them I have an equity of more than 35%. My question is, if we take a cash out refinance from one property and pay off a second property; by virtue of interest tracing rules is the interest deductible on the second property.

The reason I want to do this is because it improves on the title/closing costs for the one property while still leveraging the highest value property. This will also give the maximum possible money at a lower rate and refi the same property again if interest rates drop substantially. For reference the higher value property is in California and the rest of the properties are in Texas & Utah.

[Austin Cheatham]

If you take a cash-out refinance from one rental property and use that money to pay off another rental property’s mortgage, the IRS looks at how you use the loan. Since the money is still tied to your rental business (paying off another rental), the interest on the new loan would usually be deductible as a rental expense. This means you can likely deduct the interest on your taxes because the loan is connected to your investment properties.