0% Interest Vs Paying Interest - Tax Advice

5 Replies

Hello All!

I am in the middle of making a purchase of a duplex in my area with some creative financing. 

I have run into a couple of questions and what better of a place to go for some real estate advice than BIGGER POCKETS!

Here is my situation:

I have found an individual who is willing to do a contract for deed with me on a duplex. Terms are monthly payments for 5 years with a balloon payment at the end.

He is willing to work with me on getting creative with the financing.

My first offer was to pay full purchase price at 0%. He countered me raising his purchase price but keeping the 0% interest. I am thinking about a counter and looking for some advice.

I have two options. Both having Equal Monthly Payment & Equal Principal Due after 5 years:

1. 0% Interest with a higher purchase price

2. Paying interest with a lower purchase price

I am thinking option 2 because I plan to hold long-term so capital gains aren't really of my concern at this time. Am I correct in saying that Interest is tax deductible as a business expense? 

Am I correct in saying option 2 would be better for me?

Would love to hear any advice or guidance on my situation.

Interest is tax deductible. It’s hard to say which is better or worse. What’s the purchase price for option 1 and option 2? What’s the interest rate on option 2?

I offered him  $230,000, $15,000 down. I pay all closing and commissions. For 5 years no inerest. 5 year balloon payment.

He counters me all the same terms but purchase price $239,000. I feel like the propertys market value is more $215,000-$225,000 but the other terms were in my favor so I gave a little on the price.

This is where we are now. We're talking about a counter, that lead us to a different way of looking at it. Haven't run all numbers yet, but thinking maybe 3%??

@Grant Pope

You are gonna get a deduction in both cases.

In case 1 where you pay 0% interest and a higher purchase price. 
You may potentially not get an interest deduction(imputed interest aside) but you will get a larger depreciation expense.

In case 2 you get interest deduction but lower depreciation.

@Grant Pope Great Question! to tie into this conversation, 

question on Principle and Interest?

@Basit Siddiqi Great insight! 

I closed on my first property and wanting to see what route to take on either paying more towards principle or interest monthly? How does that affect the buyer? what do you suggest if planning to put property in LLC with own bank account to keep track of income/ expenses?

would you say Depreciation  or Interest deductions benefit you more?

Thanks in Advance to whom ever may response. 

Have a Great weekend Bigger Pockets!!

-Adrian Saucedo

@Grant Pope

I would take a higher purchase price with zero interest as this increases our basis in the property. So when you sell some day, your capital gain will be less. I would also reserve the right to resell the property without a due on sale clause. This allows you to sell with seller financing using a wrap around loan structure. Since every payment you make to your seller is principal reduction, you can literally sell the property for the same sales price that you are paying, avoid a capital gain, but make interest income by charging interest to your future buyer. 

Example..... Last year I, bought a duplex for $135,000 with $5,000 down and I paid 3% interest only payments with an 8 year balloon due. 30 days later, I sold it for $155,000 with $10,000 down and payments at 6% P & I with a 5 year balloon. The underlying loan stays in place, so I make a $517 spread each month after payments come in and go out.

I know that example is not based on a Zero interest underlying loan, but I think you can get the picture on how to be able to monetize a sale like this.

Happy Investing

Derek Dombeck

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here