Time limit to use a cash-out refi for tax purposes
Just wondering if you know of a time limit to use cash-out refi funds to purchase an investment property as it relates to mortgage interest deduction? I understand that the cash-out portion qualifies for a mortgage interest tax deduction if used on current property or second property but what if I want to refi now while rates are favorable and bank the funds until I find the right income property (eg: 6 months). Can I deduct mortgage interest for the cash-out amount over that 6 month period or am I only allowed to deduct once the funds begin usage for a ‘qualified’ deduction purpose?
Thanks for the question. Cash-out refinance interest deduction can only be taken if you use the funds to buy a property or put the money into your existing home for renovation or repairs. If you put the money in the bank for a future use, there is no way the IRS would know your future intent will indeed occur, so you would not be able to deduct interest now. I’d also strongly advise you to talk with a tax person, because you may lose the option of deducting it in the future. I’m just not sure how this works and am not qualified to advise.
Here is the IRS Publication 936 link which discusses HELOC interest deductions: https://www.irs.gov/publications/p936