I have no mortgage on my rental property for years and now would like to refinance and cash out few hundred thousand.
Can I claim the interest as an expense on my rental property?
Not according to IRS Publication 527:
You can deduct mortgage interest you pay on your rental property. When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally can’t be deducted as a rental expense. Chapter 4 of Pub. 535 explains mortgage interest in detail.
You can only decuct interest on loans used to purchase or renovate the property, not to "cash out equity". If you refinance, only the interest on portion that is used to pay off the original loan (0 in this case) is deductible.
My question is - why would you take out a mortgage on a paid-for rental when the payment eats up your return? Why not just sell it if you're desperate for cash?
Notwithstanding what @DStanley wrote, you can claim the interest as a business expense if the proceeds are used for a business purpose.
Also, you could deduct the interest as investment interest if the proceeds are used for investment.