Had a client who paid 75K for his principal residence from his parents. 4-5 years later he took a cash-out refinance. He began renting out the home he bought and used the funds from the cash-out refinance to put down a down payment on another principal residence that he moved into plus another rental property.
As it pertains to the original property turned into a rental, I believe that he should only get to deduct the portion of the interest expense relating to the the original purchase price since the funds from the cash out refinance went to purchase other. If he paid 75K for the home and has a cash-out refinance of 60K, only 50% of the interest should be deductible doing the math.
Wanted to make sure this sounds reasonable.