Cash-out interest on a rental property isn’t deductible IF it’s used for personal use. If it’s put into a business, another rental property, or a different category of investment, it can be deducted just fine.
Essentially, you deduct it AS IF it were the mortgage on the next rental, bought with cash pulled out, or business loan interest.
If you cash-out refi’ed and used it to buy a shiny new car, you’d be an idiot anyway (car loan rates are cheaper than home loans these days) and deserve to pay through the nostrils.[/quote]
“deducted just fine” is an exaggeration. First, the investment has to be traceable to an investment. And there are limitations on investment interest deductions. No income, no deduction.
It’s just not near as simple as buying for cash, then financing and pulling 80% cash out, and deducting the interest it as if it was purchase money debt. You can’t, for instance, borrow cash from a 401K, use it to buy a property for cash, subsequently finance the property, and then repay the 401K loan and deduct the interest.
