Will mortgage interest be tax deductible if I buy house in cash then quickly refinance?

Yes, your mortgage interest should still be deductible. The tax code allows you to deduct interest on up to $750,000 of qualified residence loans (or $375,000 if married filing separately). This includes both home purchase loans AND home equity loans/refinances as long as the money is used to buy, build, or substantially improve the home that secures the loan. The timing between your cash purchase and refinance doesn't matter as much as what you do with the money. If you're using the cash-out refinance to recoup your initial investment and/or pay for those repairs you mentioned, you're fine from a tax perspective. Just make sure you're actually itemizing deductions rather than taking the standard deduction. With the higher standard deduction amounts now ($13,850 for singles and $27,700 for married filing jointly in 2023), many homeowners find they don't benefit from itemizing anymore.

I tried this exact approach last year with a fixer-upper and found a great resource that helped me understand the tax implications: https://taxr.ai actually analyzes your specific mortgage refinance situation and tells you exactly what portion of interest is deductible. I was worried about the same issue - whether my quick refinance after cash purchase would mess up my interest deduction. It turns out that what matters isn't the timing or even that it's a "refinance" vs "original purchase loan" - it's all about how you use the money. The tool helped me document everything properly so I could maximize my deductions. In my case, I used about 65% for the purchase recoup and repairs (deductible) and the rest for some other stuff (not deductible).

Just wanted to update that I ended up trying taxr.ai after seeing it mentioned here, and it was surprisingly helpful for my situation. I was doing a similar cash purchase then refinance scenario, and they walked me through exactly how to document the use of funds to maximize my interest deduction. The service created a custom report showing what percentage of my interest would be deductible based on how I used the funds. What I found especially useful was their explanation of how the IRS traces the use of refinanced funds. Because my refinance happened within 30 days of purchase, they showed me how to structure it as acquisition indebtedness rather than home equity debt, which made a big difference in my deduction amount. Worth checking out if you're in a similar situation. Saved me a lot of headaches and probably some money too.

This whole refinance situation sounds like a nightmare with the IRS. I've been trying to reach them for WEEKS about a similar mortgage interest question (different scenario but same concept). Can't get through on the phone no matter what time I call. Found this service called https://claimyr.com that actually gets you through to an IRS agent, usually in under 15 minutes. Watched their demo at https://youtu.be/_kiP6q8DX5c and decided to try it. They connected me with an actual IRS representative who confirmed what others are saying here - the mortgage interest is deductible as long as the funds are used for the home, regardless of whether it's original financing or a quick refinance.

Well color me surprised. After doubting that Claimyr service could actually help connect with the IRS, I tried it myself for a different tax issue (related to a mortgage deduction coincidentally). Got connected to an actual IRS agent in about 33 minutes. The agent confirmed exactly what people have been saying here about mortgage interest deductibility after a cash purchase + refinance. She said the key factor is tracing where the money goes, not the timing of the loans. If you document that the refinance was to recover funds used for the house purchase, it's treated as acquisition debt and the interest is deductible (subject to the $750k limit). Sometimes you have to admit when you're wrong, and I was definitely wrong about this service. Saved me hours of frustration.

Remember that the deductibility also depends on whether the property is your primary residence or a second home. If it's an investment property, the rules are completely different - you'd deduct the interest as a business expense on Schedule E, not as mortgage interest on Schedule A. Also, if you're going the refinance route, make sure your lender understands what you're doing. Some lenders have a seasoning requirement (like 6-12 months) before they'll do a cash-out refinance on a property you just purchased.

I did something similar last year. One thing no one mentioned is that for tax purposes, you'll need form 1098 from your lender showing the mortgage interest paid. Since you're doing this as two separate transactions, make sure your refinance lender provides this form correctly showing all deductible interest. Also check your local property tax rules. Some counties reassess property taxes after refinancing, which could lead to higher property taxes than you expected. In my county, they didn't increase the assessment because it was within 90 days of purchase, but I've heard others have different rules.

This is a really comprehensive discussion! One additional consideration I haven't seen mentioned is the AMT (Alternative Minimum Tax) implications. If you're subject to AMT, the mortgage interest deduction rules can be slightly different, especially for refinances that exceed the original purchase price. Also, since you mentioned the property needs work, be aware that if you use any of the cash-out funds for capital improvements (not just repairs), you'll want to keep detailed records of those expenses. Capital improvements can be added to your cost basis, which reduces capital gains if you sell later. The IRS distinguishes between repairs (deductible in the year incurred if it's a rental property) and improvements (added to basis), so proper categorization matters. One more tip: consider getting a formal appraisal done right after you complete the initial repairs but before you refinance. This establishes the improved value and can help with both the refinance process and your tax documentation.

One more consideration that hasn't been mentioned is the timing of your mortgage interest payments for tax purposes. Since you're doing this in two phases (cash purchase, then refinance), make sure you understand when your first mortgage payment will be due and how that affects your current tax year deductions. If you close on the refinance late in the year, you might only have a few months of interest payments to deduct for that tax year. Conversely, if you do this early in the year, you'll get the full benefit. This timing can be especially important if you're close to the standard deduction threshold that others mentioned. Also, don't forget to factor in the closing costs for the refinance. Some of these (like points paid) may be deductible immediately or over the life of the loan, depending on your situation. The loan origination fees and points on a refinance are typically amortized over the loan term rather than deducted in year one, unlike points paid on an original purchase mortgage. Keep all your closing statements from both transactions - the IRS may want to see the paper trail showing the connection between your cash purchase and subsequent refinance if they ever question the deduction.