Tax Deductible of Cash from Refinance of SFR

[Chris Coleman]

Does all of the cash from a Cash-Out Refinance on a Rental Property have to be re-invested in order for the Interest on the new loan to be fully tax deductible?

Or can you do something else with some or all of the cash, (e.g., payoff an unrelated debt, purchase a car, etc…), would the Interest still be tax deductible?

If the answer is "yes" it must be re-invested, then does the cash have to be invested towards another RE property, or can the investment simply be in something RE related, such as a Note, Hard Money, or Crowdfunding? Or can the investment be in something completely outside of RE, such as a new business venture, stocks, etc?

Also, again if the answer is “yes” it must be invested, is there a time limit within which it must be re-invested?

Steven Hamilton II, Linda Weygant, Brandon Hall, and others…thank you for your contributions, your expertise is greatly helpful and appreciated!

Thanks

[Brandon Hall]

@Tim Watcke This is a common misconception.

@Chris Coleman A cash out refi is not a taxable event. Thus the proceeds can be utilized however you want without worrying about triggering tax consequences from receiving the cash.

However (this is a BIG however), we must always use debt tracing rules to determine whether interest is tax deductible.

If you use the proceeds on another property, the interest is deductible on the funds applied to that property. If the funds are used for business, the interest is deductible on Sch C. If the funds are not reapplied but sit in your bank account or are used for personal stuff, the interest is non deductible.