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Posted by Harlan Lunsford on February 19, 2007, 8:46 pm
Please log in for more thread options olivia.carmichael@gmail.com wrote:
> I have been bothered with question for a while, and would
> appreciate any advise.
>
> I own a rental property (mortgaged) with some equity (~40K)
> in it. When I file taxes, I use the interest paid on the
> mortgaged loan for the rental propety to subtract from the
> rental income. This helps deduct the rental expenses to
> reduce the income tax liability due to teh rental income.
> Now, I need some funds to pay off some personal loans and am
> planning on refinancing the rental property loan to an
> higher amount (reduce equity) but use the recovered
> difference to go from a lower loan amount to a higher loan
> amount and pay-off some personal loans with that difference.
> Here is the question:
Just last week I counseled a client who told me his
intentions were to "cash out" some equity in his rental
property.
> - If the rental loan is refinanced, it is legitimate/legal
> to use the greater interest paid on the new loan and deduct
> it as a rental expense?
No. You must prorate the interest according to the
relationship between the pay off figure and the total
refinanced.
> - Can the points and closing cost paid for the refinanced
> loan be deducted as an expense on the rental property?
Same answer as above. Only a percentage of those points and
closing costs will pertain to the rental property. Any
balance of both interest and points and closing costs will
be personal in nature and NOT deductible. Nowhere. Nohow.
To illustrate, if payoff if 50,000 and you refinance for
75,000, then your percentage is 66 2/3% and you can deduct
that percentage of interest and other items on schedule e.
ChEAr$,
Harlan Lunsford, EA n LA
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