Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
Hope everyone is having an awesome Tuesday!
Would you guys do a cash out refi on a property purchased with cash, simply for the purpose of writing off mortgage interest? I believe you can write of interest up to a max of 2 mortgages; someone correct me if I am wrong on this.
This may also help with a future cash purchase of a property. However, its becoming increasingly difficult to find suitable B&H properties in my local area, I don't really need the cash. Would you do it for the tax purposes as I mentioned?
If it's purely to be able to deduct the interest on your taxes, it's not a good idea.
An example: You paid $100 in interest, then deducted the $100 from taxes. If we assume a 25% tax rate, then you've reduced your taxes by $25.
So you've paid $100 in interest to save $25 in taxes. That leaves you down $75. If you think that's a good idea then, please, feel free to send me $100 and I'll happily send you $25. :)
If it's purely to be able to deduct the interest on your taxes, it's not a good idea.
An example: You paid $100 in interest, then deducted the $100 from taxes. If we assume a 25% tax rate, then you've reduced your taxes by $25.
So you've paid $100 in interest to save $25 in taxes. That leaves you down $75. If you think that's a good idea then, please, feel free to send me $100 and I'll happily send you $25. :)
True, but it seems like having the cash ready may help when a deal does come, because by the time you try to do a cash-out refi, someone else had snatched the deal and is already in escrow.
If you plan to use the money to invest with, then that's a different matter. I suppose you'd have to decide if the interest you're paying in the mean time is worth the opportunity to have the cash immediately available. Personally, I would only do it if I was pretty sure I would be using it in the near future.
As to the writing off interest on up to two properties, I'm not a tax expert, but I'm not aware that there is a limit on the number of properties if they're being used as rentals.
If you pay mortgage interest on rental property it is a deductible business expense whether you operate one unit, a thousand or more.
There is definite value to having cash on hand if you are planning on making more offers. Not only can you move quickly but a cash offer should allow you to demand some discount to market price. Only you can assess what that is worth in your market.
There may be an asset protection benefit to encumbering properties with mortgages. An unencumbered property may look like a nice prize in a lawsuit--a property with a large loan encumbering it may not look so attractive.
That is why credit lines are so great and there are no closing costs. If you refi a property to buy another property you have those CC then you will probably refi the property you just bought and have more closing costs.
@Andrey Y. Cash at hand is great to have, and it is great to have some cash on the side in case you need it. We are currently doing cash outs on a couple of our houses so we can have a some extra money in the bank, and decide how to best use it afterwards.
I'm always confused by how this idea seems to have been perpetuated that there is somehow some kind of loophole where you can give away money, but then by writing things off on your taxes you can end up coming out ahead. I always see people talk about the idea of "donating money just for the tax write-off", and this post seems to be inspired by the same idea. You're losing money at around a 3:1 ratio with what you save in taxes every time, so tax write-offs are *never* a reason to give money away to something.
Now if you have other reasons for taking the equity out, by all means, but tax write-offs is not one of them.
Seems like a HELOC would be ideal in this situation. Use the cash only when needed, and only pay interest when you borrow it. Plus, as far as I know, the interest is still tax-deductible.
Okay @Andrey Y. you kind of changed your story here when your title of this thread is "Cashout refi, simply for interest tax write off" then you add that you want to have cash on hand for your next purchase - those are two very different reasons to do a cashout refinance.
@Adam Moehn illustrated the reason the tax write off idea is not a good reason to cashout refi. Your second stated reason makes all the sense in the world. As mentioned, your best option is a LOC against the equity in the property. You can access the same amount of money and pay no interest until you use it. The term HELOC is more commonly used for a primary residence in my market and commercial lenders refer to a LOC for what we are talking about here.
Okay @Andrey Y. you kind of changed your story here when your title of this thread is "Cashout refi, simply for interest tax write off" then you add that you want to have cash on hand for your next purchase - those are two very different reasons to do a cashout refinance.
@Adam Moehn illustrated the reason the tax write off idea is not a good reason to cashout refi. Your second stated reason makes all the sense in the world. As mentioned, your best option is a LOC against the equity in the property. You can access the same amount of money and pay no interest until you use it. The term HELOC is more commonly used for a primary residence in my market and commercial lenders refer to a LOC for what we are talking about here.
Sorry mate, adult ADHD kicked in. As in life and RE, things can change from one moment to the next. Fluidity.. :)
Thanks everyone for the input. It seems like the HELOC would have a much higher interest rate than a refi. Would the HELOC also need an appraisal before its issued?