Tax implications for using your primary residence to fund an investment vs loan?

[David Melvin]

We own our primary residence free and clear (do not have a mortgage on it) therefore we have equity in it and are wondering if we should do a cash out refinance to fund an investment property (versus getting an investment loan with a higher interest rate).

It seems like the logical thing to do to get the lower interest rate, but we are worried we might miss some tax deductions on the investment property by doing so. Does it all equal out in the end because we are getting to write off the mortgage on our primary residence off our ordinary income or does it make sense for us to have a loan on the investment property itself?

thank you for your help!

[JD Martin]

You can write off interest on a HELOC on your primary if it was used to purchase investment property. Keep good records and don't use the HELOC to purchase anything else - you don't want to muddy the waters if you ever need to prove the purpose for the HELOC. You can also write off other types of interest such as CC interest if used specifically for the purchase of investment property. I bought a house with a CC twice and was able to write off CC interest as related to that house. Again, don't use the CC for anything else. If you are going to just take a second mortgage on your home to access the cash, again as long as you use that money just for buying the property the interest is deductible, whereas if you're going to try to write that interest off against your personal (W2) income you may not have enough total deductions to itemize and you would lose it.

The main thing is you need to have clean records.