Finance
A Washington borrower completes a 'cash-out refinance' on their investment property. The proceeds are used to purchase a second investment property. For IRS purposes, the interest on the refinanced loan is:
ANot deductible because it is personal debt
BGenerally deductible as investment interest or business interest if the proceeds are used for investment purposes✓ Correct
CDeductible only as passive activity interest
DNon-deductible because the property is refinanced, not newly purchased
Explanation
When refinanced loan proceeds are used for investment purposes (such as purchasing another investment property), the interest may be deductible as investment interest expense or business interest, subject to applicable limitations under the tax code.
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Key Terms to Know
Debt-to-Income Ratio (DTI)
A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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