How do I enter a cash-out refinance on a rental property?

Forum|Forum|5 years ago
March 27, 2021
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I refinanced my rental property and took a cash out that is approximately equal to my outstanding loan balance. My understanding is that I can only deduct half my mortgage interest as a result. Do I only enter half the mortgage interest on my 1098 entry? Or do I account for this some other way? I don't see any page that asks me about a cash out refinance specifically 😞

MAK70

You do not have to report information on a refinance, you are correct that you deduct the interest- do not change the 1098 for the entry.

Carl11_2

Employee

you do not have to report information on a refinance, you are correct that you deduct the interest- do not change the 1098 for the entry.

My interpretation of the above statement is contradictory, based on my interpretation of the question. So let's clarify things a bit here, to help ensure accuracy and understanding by all parties on all fronts.

I refinanced my rental property and took a cash out that is approximately equal to my outstanding loan balance.

My interpretation of the above is understood to be as I've reworded the question below.

I refinanced my rental property for approximately double what I owe on it.

If my interpretation is correct, then at this point in this post, you can only deduct on the SCH E that percentage of mortgage interest that is equal to the percentage of the amount refinanced, that was used to pay off the first loan. Example:

Refinanced on 7/1/2020 for a total loan amount of $100,000.

$50,000 of that $100,000 was used to pay off the original loan.

I have $50,000 cash left, that I can do anything I want to with.

With the above example, I can only deduct 50% of the mortgage interest on the refi loan, for the entire life of that loan. The other 50% of mortgage interest is just flat out not deductible. Period.

Now, there are things that "could" allow you to deduct more than 50% of that interest. For example, if you used $25,000 of the cash out money to put a new roof on the rental property, that's a property improvement. So that means you now have a total of $75,000 invested into the property. That's 75% of the refi loan. Therefore, you can claim a maximum of 75% of the interest on that loan every single year, for the life of the loan. This is but one example of many possibilities that would allow you to deduct a higher percentage of the mortgage interest on the SCH E. It's also possible that if you use any of that cash to improve your primary residence, then a corresponding percentage of that interest could be claimed as a SCH A itemized deduction.

jotheturtleAuthor

Thanks @Carl11_2! I understand what you're saying and I understand that I would only deduct on the SCH E that percentage of mortgage interest that is equal to the percentage of the amount refinanced. In my case, that is 54%. What I'm wondering is, how do I do enter that in TurboTax? Do I only enter 54% of the number shown on my 1098? Or is there some other place where I say, hey TurboTax, please deduct only 54%?