Tax effect of personal residence cash out loan used for investing

[Russell Roberts]

I did a cash out refinance on my primary residence in 2017.  I did Not use the loan proceeds to buy, build, or substantially improve my primary residence.  Instead, I used it to fund other real estate investments.  Some was used for down payment on single family rental properties.  Some was used to invest as limited partner in a larger syndication deal which provides me with a K-1. 

With the 2018 tax law changes, I understand that the interest expense no longer qualifies as deductible on my itemized federal income tax because I did not use the loan funds in a qualifying way (to improve the primary residence).

My question: Can I match up this personal residence interest expense against my investment property income from the single family rentals and K-1 returns?  That is exactly how I used those loan proceeds..    thanks for any advice.

[Michael Plaks]

@Russell Roberts

The linked article does not help with your question.

1. Single family rentals - yes, as long as you follow interest tracing rules mentioned by @Basit Siddiqi. You would need to show that the cash-out proceeds were deposited to a certain account, and then a specific portion of this money was used for the purchase of the properties. 

2. K1s - yes but probably no. Sounds weird? That portion of the interest cannot directly offset your K1 income. It is "investment interest" which goes on the personal itemized deductions Schedule A. In order to benefit from it, you would need to have a total of your allowable itemized deductions higher than the new standard deduction - which doubled for 2018, compared to 2017 and before. So, while technically deductible, for most people it ends up being useless. 

Besides, it is limited to the net investment income. So, if your K1 comes with a loss - there is no deduction for this interest.