Deductible interest after a cash-out refi

[Mark Jones]

I need some help understanding what interest I can/can’t deduct on schedule E.

I did a cash-out refi on the duplex I live in back in August. That refi also paid off a heloc I had on the property. 75% of that heloc had been used for a down payment on another rental 2 years ago.

So with the interest I’ve paid on the new loan, I believe I can’t deduct the amount that would for the cash-out (as a percentage of the principal). What I’m not sure about is the heloc portion of the new loan. Am I allowed to deduct the 75% of the heloc portion of the new principal? Then I’ll deduct 50% of the original loan portion since only 50% of the residence is a rental?

Hopefully I described this well enough. Engineers know numbers but that doesn’t mean they are any good at explaining them.

Are there any other tax implications that this would have had?

[Ashish Acharya]

Originally posted by @Mark Jones:

I need some help understanding what interest I can/can’t deduct on schedule E.

I did a cash-out refi on the duplex I live in back in August. That refi also paid off a heloc I had on the property. 75% of that heloc had been used for a down payment on another rental 2 years ago.

So with the interest I’ve paid on the new loan, I believe I can’t deduct the amount that would for the cash-out (as a percentage of the principal). What I’m not sure about is the heloc portion of the new loan. Am I allowed to deduct the 75% of the heloc portion of the new principal? Then I’ll deduct 50% of the original loan portion since only 50% of the residence is a rental?

Hopefully I described this well enough. Engineers know numbers but that doesn’t mean they are any good at explaining them.

Are there any other tax implications that this would have had?

 So you have three prongs

1) cash out refi up to original mortagage- yes 1/2 of the interest  would be still be deducted if you rent the others unit in your duplex. Other half can be deducted as itemized deduction if you choose to do so. 

2) extra cash out refi used to pay the heloc that was used to fund a rental - yes the interest on the portion that you used pay off the heloc used for rental is deductible at rental level. Good tracking and bookkeeping is required to sustain the deduction. 

3) interest  on the extra cash out refi used for personal purpose is not deductible.