0% Interest Vs Paying Interest - Tax Advice

[Grant Pope]

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.

[Basit Siddiqi]

@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.