Primary home cash out refinanced in 2018. Converted to rental later in 2018. No refinance after rental conversion. Can i deduct all interest paid as expense?

Forum|Forum|6 years ago
June 3, 2019
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I refinanced my primary home in feb’ 2018 with a cash out. Later during june’18, i converted the primary home to rental but did not use the cash out for home improvement. I did not refinance after i converted to rental in june’18. For the calculation of mortgage interest as expense, IRS publication only discusses the scenario of cash-out refinancing done after rental conversion.Since i started the rental with the cashout refinanced amount, can i consider the entire mortgage interest paid on it as my expense on the rental property?

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Leonard11_2

Employee

No, you can not consider the total mortgage interest as an expense against the rental. You can only claim as an expense the mortgage interest paid after the property was converted to a rental. Mortgage interest paid prior to the conversion may be deducted on Schedule A if you itemize your deductions.

Customer1001Author

Employee

Thanks for the response! I guess i was not clear in my question. I will try to walk through the scenario. My primary home had an original loan amount of 100k. I did a cash out refinance to 900k in feb 2018, when the house was still my primary home. But during june 2018 i bought a new primary home and converted the first home as rental. I did not do any refinance after i converted to rental. Can i claim the interest paid on 900k loan from june thru december as the expense? Or am i limited to only the interest paid for the original loan amount of 100k? Since at the time of conversion to rental, i had a loan of 900k ( inspite of cashout refi from100k when it was a primary home), i am assuming that i can count all of interest on 900k ( june thru dec) as expense on rental and claim loss. Please let me know.

ColoRock

Did you ever get an answer? I have a similar situation. I did a cash-out refinance on my primary home a couple years ago. Used the proceeds for personal use. This year I converted the same primary home to a rental. So, same question: since the cash out for personal use happened before the home was converted to a rental, after it is converted is all the interest on the mortgage a deductible expense, or do I have to make an adjustment for the prior cash out?

This is all a timing issue...the IRS is VERY clear if you were to do this after a rental unit is place into service. Nothing on conversions where this occurs while your primary residence.