Cash out refinance and investment property

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Subject Author Date Cash out refinance and investment property Mahesh 08-28-2009  Re: Cash out refinance and investment property D. Stussy 08-28-2009  Re: Cash out refinance and investment property Seth 08-28-2009  Re: Cash out refinance and investment property Drew Edmundson 08-28-2009  Re: Cash out refinance and investment property way222 08-28-2009
Posted by Mahesh on August 28, 2009, 1:33 am Please log in for more thread options Folks, I was planning to buy an investment property using an all cash offer to have a leg up on other investors in a multiple offer situation. Ideally, I would like to get the investment property financed to start out (so I get a tax break on the mortgage interest), but then I lose the leverage outlined above. Another option for me is to do a (cash-out refinance) on my primary residence and use that to fund the investment property. I wanted to know the following: 1. Can I get a tax break if I do a cash out on my primary property (is the mortgage insurance deductible)? 2. Will the tax break I get in (1) be equal to the tax break I get if the investment property was financed to begin with (i.e. is this a zero sum game). 3. Any other options? Thanks. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by D. Stussy on August 28, 2009, 9:21 am Please log in for more thread options > I was planning to buy an investment property using an all cash offer > to have a leg up on other investors in a multiple offer situation. > Ideally, I would like to get the investment property financed to start > out (so I get a tax break on the mortgage interest), but then I lose > the leverage outlined above. > > Another option for me is to do a (cash-out refinance) on my primary > residence and use that to fund the investment property. > > I wanted to know the following: > > 1. Can I get a tax break if I do a cash out on my primary property (is > the mortgage insurance deductible)? No. Taking out a loan doesn't affect your taxes. (The payment of interest on the loan may be deductible, and the cancellation of debt should you not pay it back may be taxable.) > 2. Will the tax break I get in (1) be equal to the tax break I get if > the investment property was financed to begin with (i.e. is this a > zero sum game). Yes. > 3. Any other options? -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Seth on August 28, 2009, 12:32 pm Please log in for more thread options >> I was planning to buy an investment property using an all cash offer >> to have a leg up on other investors in a multiple offer situation. >> Ideally, I would like to get the investment property financed to start >> out (so I get a tax break on the mortgage interest), but then I lose >> the leverage outlined above. >> >> Another option for me is to do a (cash-out refinance) on my primary >> residence and use that to fund the investment property. >> >> I wanted to know the following: >> >> 1. Can I get a tax break if I do a cash out on my primary property (is >> the mortgage insurance deductible)? > >No. Taking out a loan doesn't affect your taxes. >(The payment of interest on the loan may be deductible, and the >cancellation of debt should you not pay it back may be taxable.) Mortgage insurance is deductible as investment expense if you make sure the money you get from the loan is easily tracked to its use for the purchase of the investment property. That would also make the interest on the loan investment interest (rather than mortgage/home loan interest), with different tax consequences. >> 2. Will the tax break I get in (1) be equal to the tax break I get if >> the investment property was financed to begin with (i.e. is this a >> zero sum game). > >Yes. No. The interest rates are unlikely to be equal. Under some circumstances, especially if the usage of the borrowed money isn't tracked, the tax consequences will also be different. >> 3. Any other options? If you can arrange financing in advance, your ability to close should still be better than your competitors who have to offer conditional on obtaining financing. You can also take out the home loan _and_ arrange financing; at closing, the seller doesn't care where the certified check comes from, so pay with the financing and repay the home loan. Seth -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Drew Edmundson on August 28, 2009, 3:07 pm Please log in for more thread options >Folks, > > >I was planning to buy an investment property using an all cash offer >to have a leg up on other investors in a multiple offer situation. >Ideally, I would like to get the investment property financed to start >out (so I get a tax break on the mortgage interest), but then I lose >the leverage outlined above. > > >Another option for me is to do a (cash-out refinance) on my primary >residence and use that to fund the investment property. > > >I wanted to know the following: > > >1. Can I get a tax break if I do a cash out on my primary property (is >the mortgage insurance deductible)? Assumption: you have never refinanced your home and rolled other debt into or taken cash out and you have no home equity line. It depends. The interest on the additional debt on your residence is not deductible as residence interest on debt in excess of $100,000. The interest on the first $100,000 of additional debt is not deductible for alternative minimum tax (AMT). The interest on the excess may be deductible against the investment if you can trace the proceeds as required by the regulations. There may be a way around this if you elect to treat the mortgage on your primary residence as not being on your primary residence but then you lose the Schedule A deduction on the interest on the existing loan balance. Although there are those who argue that you can bifurcate the new loan and only treat part as not being secured by your residence. As I read my response, I realize this forum is not the best way to discuss your options. I recommend you call your tax advisor, the money will be well spent. >2. Will the tax break I get in (1) be equal to the tax break I get if >the investment property was financed to begin with (i.e. is this a >zero sum game). Only in rare circumstances. For example, if you are not subject to AMT and you do not borrow more than $100,000 extra. Even then the interplay of the phasing in and out of various credits and decutions could make option 1 a poor tax choice. >3. Any other options? Arrange the financing on the investment property up front is the easiest and best option. Drew Edmundson, CPA Cary, NC -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by way222 on August 28, 2009, 6:47 pm Please log in for more thread options > > 3. Any other options? > Assuming this is a schedule E-type property, I believe that if you pay cash for the investment property, and then refinance the investment property within a certain period of time, then the mortgage is considered acquisition debt and the interest is deductible on schedule E. I don't remember how long. Also, my understanding is that any non-mortgage interest spent on the investment property can be deducted on schedule E as an "other interest" expense. If you want to get a mortgage on the investment property at some point you should investigate the availability of financing up-front. It can be quite difficult these days to get financing - there are a lot of new rules about reserves etc, and appraisals have become a real PITA. Especially if you are in an area with a lot of distressed properties - many banks won't do these mortgages at all any more. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted Points on refinance deductible if cash out used to renovate? January 24, 2008, 8:31 am Buy property as an S-Corp with cash, and later sell it to myself for 30yr mortgage. May 8, 2007, 12:52 am gifted property--can it be considered an investment? 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