Question

Cash out Refi to buy a primary home

Forum|Forum|5 years ago
November 11, 2020
1 reply
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Hello,

I would like to understand the tax implications. I have home in Texas that I have been renting out to tenants for many years. My wife and I live in an apartment in CA. This year we decided to do a cash out refi since interest rates are so low so we can put at least a 20% down on a primary home in CA.

We don't have a home in mind, but the lender who will work on our CA loan mentioned to us that it would be better to get the cash-out refi done first to be ready once we find a home in CA, but just keep the bank in an account and don't touch it.

1) Since we don't have a home yet, what are the tax implications ? The cash that we will receive is it considered taxable income? Do we have to pay taxes?

2) Now that the home in texas has been refinanced at a lower interest rate, how do I update turbo tax so it know that it understands the changs that happened so I can deduct the right deduction?

Critter-3

1) Since we don't have a home yet, what are the tax implications ? The cash that we will receive is it considered taxable income? Do we have to pay taxes? A LOAN is never taxable income.

2) Now that the home in texas has been refinanced at a lower interest rate, how do I update turbo tax so it know that it understands the changs that happened so I can deduct the right deduction? You will enter the mortgage interest but you will need to prorate it ... the HELOC portion going to the Sch A and the rental portion to the Sch E.

O

Opus 17

Employee

A loan is never taxable income as long as you pay it back.

Because the house you refinanced is a rental property, deducting the interest on the refinance loan is problematic to say the least. At best, only part of the interest is deductible as a rental expense, that will be the part that is attributable to the original debt on the property before the refinance. For example, if the remaining balance on the mortgage was $50,000 and you refinanced for $100,000, then at most, 50% of the interest is deductible on schedule E as a rental expense. However, if you are audited, you will need to show the IRS a paper trail that proves that the portion of interest you declare as a rental expense can be directly tied to the rental property.

The interest that you pay on the cash out portion of the mortgage will never be deductible under any situation. As a cash out home equity loan, equity interest is not deductible on schedule A as an itemized deduction. Only interest on loans that are used to buy, build, or substantially renovate your personal home may be deducted on schedule A. However, even after you buy a house with that money, that interest is never deductible, because in order to deduct a home mortgage the loan must be secured by the property in question. Since this refinanced loan will not be secured by the house you eventually buy, the interest will never be deductible.

Once you purchase your new primary residence, you might be able to finance or refinance it in such a way that you pay off the equity part of the loan on the rental property and so that the mortgage for the residence is secured by the residence itself. That would make it deductible as a personal itemized deduction on schedule A.