Tax deductibility of debt?

[Mr. Boh]

With the new tax legislation doubling the standard deduction I was considering changing the location of my debt. I currently have a $240k mortgage on my primary residence and two paid off rental houses. Because the standard deduction is now larger than my itemized deduction (including mortgage interest) and in an effort to reduce my schedule E income, I was planning on paying off my mortgage with a new loan on one of my rental houses. However my accountant informed me that this would not work. I was told that I wouldn't be able to subtract the interest of the new loan from rental income because the rental house was not the original purpose of the funding. Does this sound right? Can anyone shed some light on this subject for me?

Thanks.

 

[robartsd]

I think you can cash out refinance your rental property to access some of the equity. What you do with the cash (pay off primary residence mortgage or invest in other opportunities) has no bearing on the interest that is being used to pay for the mortgage of the rental property. There is a gottcha in that you could end up with too little equity left to pay the tax bill due when you realize capital gains on the sale of your rental property.

http://smallbusiness.chron.com/tax-implications-refinancing-investment-property-61814.html

edit: punctuation

[Sibley]

What robartsd said.

Watch your basis though, that could really trip you up.

[Mr. Boh]

Thanks for the replies.

The linked article only references refinancing an investment property. I would be financing it for the first time as I bought it with cash. Maybe this is an important difference?

As for the gotcha, I'm not worried about the capital gains because I have absolutely no plans on selling the house I would put the debt on.

[Mr. Boh]

I talked to a different CPA and he gave me a little more detail. Apparently I won't be able to deduct interest from a new mortgage on a paid off rental house based on "interest tracing rules". You are only able to deduct the interest you pay on a loan to purchase or improve a rental property. Yes it is idiotic.

[SeattleCPA]

I talked to a different CPA and he gave me a little more detail. Apparently I won't be able to deduct interest from a new mortgage on a paid off rental house based on "interest tracing rules". You are only able to deduct the interest you pay on a loan to purchase or improve a rental property. Yes it is idiotic.

+1