Marilyn had a question that I suspect other people have these days:

If I refinance my rental property, am I allowed to write off any portion of the interest on the new first trust deed?

For income tax advice, I turned to Victor Omelczenko, media relations for the IRS. He got back to us with some expert opinion. Here it is:

The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. In order to deduct interest to refinance a mortgage on a rental property, the proceeds from the loan must be traced. The loan proceeds should be categorized in the following types: trade or business; investment; or personal. The interest deduction will depend on which of these categories the proceeds were used. For example, if the loan proceeds were used to pay off the existing mortgage, then the interest expense would be deductible as a rental expense on Form 1040, Schedule E, Supplemental Income and Losses. If the proceeds were reinvested in the existing rental property by making improvements, then the deduction would also be a rental expense deduction. If the refinance proceeds are invested in a new rental property, the related interest expense should be deducted against the income on that new property. If the proceeds are used for personal use (vacation or car, etc.), the interest on those proceeds is non-deductible. If you pay closing costs on a refinance of a rental property, then the closing costs are treated as capital expenditures and amortized over the life of the loan with any points.

You should consult your tax professional prior to refinancing to see how these rules apply to you. For additional information on tax treatment of business interest expense, please see IRS Publication 535, Business Expenses, Chapter 5. You can call IRS at (800) 829-3676 to order the publication or visit http://www.irs.gov to download, view or print the publication.

I hope that helps. As always, if you have additional insight, please share it here. If you have a business question of your own, write me at abruce@VenturaCountyStar.com with "Ask Allison" in the subject line.

Note to readers: Questions and answers may be lightly edited for length and clarity.