Refi Duplex Complication

3 Replies

A friend of mine has somewhat of an interesting situation.  They got a special loan from a state economic development body that outlines a loan for owner occupied duplexes.  He got this special loan with a fixed rate and low closing costs because the loan outlines that you have to be owner occupied and if you move out you will have to refi.  He has since gotten a job across the country and is renting both units out.  He said that he has talked with many different investing professionals and they all tell him to forget refinancing and just sit on the loan because they have little recourse if you are paying your mortgage.  Fine, but shouldn't he refi into a no owner occupied so he can depreciate the whole property and not just half?  He cashflows and I think that depreciating more of the building is better even though he will have to increase his interest rate by about 100 basis points.  Details:

PP: 240000

Annual rents: 27600

Assessed: 280000

Owes: 220000 @4% 30yr fixed

Built:1960

Owned for 3yrs.

Annual taxes: 5600 

Originally posted by @Andrew Stahl :

A friend of mine has somewhat of an interesting situation.  They got a special loan from a state economic development body that outlines a loan for owner occupied duplexes.  He got this special loan with a fixed rate and low closing costs because the loan outlines that you have to be owner occupied and if you move out you will have to refi.  He has since gotten a job across the country and is renting both units out.  He said that he has talked with many different investing professionals and they all tell him to forget refinancing and just sit on the loan because they have little recourse if you are paying your mortgage.  Fine, but shouldn't he refi into a no owner occupied so he can depreciate the whole property and not just half?  He cashflows and I think that depreciating more of the building is better even though he will have to increase his interest rate by about 100 basis points.  Details:

PP: 240000

Annual rents: 27600

Assessed: 280000

Owes: 220000 @4% 30yr fixed

Built:1960

Owned for 3yrs.

Annual taxes: 5600 

 I haven't read the settlement paperwork that your friend signed, so I will not comment on that. And until you have personally read all 100 pages that they signed at the closing table, I'd suggest you refrain from having an opinion on what they "need" or "don't need" to do either way. I'm not saying you or your friend are right or wrong, I'm merely suggesting that we have no way to know at present. 

However, I've never encountered a circumstance wherein a past client needed settlement paperwork from the purchase or refinance mortgage in order to realize the full tax benefits of having an investment property. Most tax professionals seem to be of the opinion that you can get the full tax goodies regardless of the type of financing you are in. 

His type of loan has no bearing on what he can depreciate. Many, many people rent out their house after they move out, keeping their owner occupied loan in place.....not saying he should keep This particular loan in place.