BiggerPockets

We have an opportunity to refinance our home and cash out enough to pay off one of our rentals. By doing this we will lower our monthly payment by 450/mo OR if we make the same payments we can reduce our total cost over the life of the loan by 55k and pay it off 9 years earlier.
We won't have the interest to deduct on Schedule E for this house, even though we will be able to deduct if on our personal schedule.

Will the increased profit on the LLC outweigh the increased deduction on the personal side? Or do they tend to wash out?
Or should I even care since I have the potential to pay it off 9 y and 55k earlier?
Obviously, my qualified tax professional would provide the best input here, but I am hoping to get some quick input before I shell out her hourly fee.
Thanks for any input!

Another angle in which to look at it is your ROI. What will be your return on the money you take out of your home and use to pay off the mortgage on your rental?

Maybe you'd be better off using the cash taken out to put down on another rental property, or by making a hard money loan to an experienced rehabber/investor.

THE END IS NEAR!!!!!!!!. I find myself agreeing 100% with the Zivmaster. That is scary. Great points , Eddie.
The only thing missing is to determine what the goals and strategy is of S Harper is. That would also make a difference. Age? Your funds may do more you by investing in other properties. Rich

Mortgage interest deduction for personal residence phases out with increases in income at a certain threshold (depends on single or married status).

Mortgage interest on a rental can ALWAYS be deducted from the rental income on a rental.

To not lose any mortgage interest deductions, my CPA wants me to start looking at paying off the house where I live, by taking refi money from the rental property!

As to whether you will really have better cash flow ... It is said that any property can have positive cash flow as a rental when it is paid off in full - that is a given. So that bigger mortgage on your personal residence will be paid by you taking income from another source (say your 9-5 job). Effectively, this means that you have that other income subsidizing your rental so that the rental looks better as a rental. I just don't like the idea of me working extra to make the rental a more affordable thing for a tenant by subsidizing that rental with my other income source(s).

As to the 1031 exchange: if you were to have a HELOC on your personal residence, you could use that to instantly pay off the mortgage balance if needed to facilitate a 1031 exchange; so you can defer the full payoff until you are in a 1031 exchange scenario.

The best advice that I've read in the other posts in this thread was to use your CPA for tax PLANNING, not just tax preparation. And then the suggestion that your funds might do better by being invested in more properties.

I would suggest the following: have mortgages on the rental properties to the extent where they still cash flow positive (do not over-leverage into negative cash flow); have your personal residence paid off, AND have a big HELOC on that personal residence for emergencies or for investing further. Some even consider that big HELOC as a form of asset protection, since the equity in that property appears to be less than the value of the paid off property (supposedly to keep the lawyers from pursuing lawsuits against you with the property as the target to get paid out of).

Hi, In short, it is not a wash as the increased income to the business has an opportunity to be reduced by other expenses which are not available under your personal deduction. The opportunity cost of financing should be assessed not only on an after tax basis but primarily on the use of funds and economic alternatives available to you. What is your cost of money on the rental, is that the best use of funds? What about acquiring other properties and increasing cash flow, providing additional income? With current rates providing new financing could you then reduce higher rate obligations from newly generated income even faster? If leveraging yourself into other ventures is not a viable option or in your business plan, reducing existing debt is always a good idea. Tax consequences alone will probably not justify re-financing, the question should be, whats the best use of funds made available? Good Luck, Bill

Thanks Eddie. I've been told I have a great sense of humor, just not in politics. I find nothing humorous there. Rich, heading to Hong Kong today.