Commercial Line of Credit & interest - CPA question

Commercial Line of Credit & interest - CPA question

Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes

Hello BP, I have this question.

I'm looking to potentially obtain a commercial line of credit with an interest rate of 5%, per the bank. I would be getting it against one of my rentals which is owned outright. This is as an alternative to refinancing it with cash out, at similar (maybe 4.5%) rate. So the commercial line of credit has so far 2 things going for it - an alternative to refinance and therefore closing costs, and competitive interest rate. 

Now supposing I got the line of credit for say $100K and over the course of a year paid $5000 in interest, is that interest treated the same way as mortgage interest?

I did search the forums a little, but went down too many squirrel holes before I gave up. I appreciate anyone's answer.

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Tim DelaneyPro Member
Buffalo, NY · Member since 2018 · 790 posts · 530 votes
7y

Are you asking if that interest payment is tax deductible? I would think that if you set up your ownership of the house as a business entity and are taking a commercial line of credit then yes, it would be deductible as a business expense. From my understanding the interest on a HELOC's on your primary residence is not tax deductible, but since this other home is an investment it should be. I am NOT a CPA though, so obviously cross-check my info.

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  • Rental Property Investor · Florence, SC · Member since 2019 · 6 posts · 4 votes
    7y

    Hi Michael,

    I've used a line of credit on one of my properties and it acts close to the normal primary home equity HELOC. You will on pay interest on the amount you use. If you don't draw it, you don't pay interest. This is how the one I used worked for me. A lot more convenient that re-fi, my bank paid all fees when I set up my LOC. Hope this helps and good luck.

    John Evans  

  • Tim DelaneyPro Member
    Buffalo, NY · Member since 2018 · 790 posts · 530 votes
    7y

    Are you asking if that interest payment is tax deductible? I would think that if you set up your ownership of the house as a business entity and are taking a commercial line of credit then yes, it would be deductible as a business expense. From my understanding the interest on a HELOC's on your primary residence is not tax deductible, but since this other home is an investment it should be. I am NOT a CPA though, so obviously cross-check my info.

  • Rental Property Investor · NorCal · Member since 2018 · 399 posts · 222 votes
    7y

    In the scenario you outline interest is a legit business expense.

  • Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
    7y

    @Tim Delaney @Account Closed

    Gents thank you for you replies! I do agree that it would be tax deductible since it is a legit business expense. I'm not sure I'll walk down that road yet. 

  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Michael King I see you have some responses above but there is an entirely separate "tax" forum for these types of questions.  Just a thought to post there too if you would like.

  • Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
    7y
    Originally posted by @Andrew Postell:

    @Michael King I see you have some responses above but there is an entirely separate "tax" forum for these types of questions.  Just a thought to post there too if you would like.

     Thank you Andrew, much appreciated! Right now I may be getting the loan with a commercial lender here in St. Louis, and it will be for a mortgage so for the moment, the question is a moot point. Thanks again! 

  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Michael King

    You have to follow the interest tracing rules to determine its deductibility.
    if the funds are used for a business, real estate investment, then it may be potentially deductible.

    If its used for personal items, it would not be deductible.

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