Cash out refinance to buy out partner

[David Weymouth]

My son and I entered into a partnership on a rental 5 yrs ago. The plan was to sell once he was ready to purchase his own home. My wife and I have instead decided to keep it, do a cash out refinance, reduce our mortgage from 5% and pay him his share. My main question is there going to be any problem with still deducting all the mortgage interest. Basically the funds from the cash out would go directly to him. Any thoughts would be great!

[Michael Plaks]

@David Weymouth

Let me make sure I understand. 

- You and your son bought a $100k rental property with $30k cash and $70k mortgage. 
- The property is now worth $150k, and you refinanced your $70k mortgage into a $110k mortgage.
- The entire $40k cash from refinance you're paying your son in exchange for his interest in the property, so now you own it 100%.

If this describes your scenario (minus my random numbers of course), then you can deduct the entire interest on the new loan.

Your son will likely have some capital gain tax. Calculating your new tax basis in the property may get tricky, so professional help is recommended.