HELOC vs Cash Out Refinance and Tax Ramifications

Tax, SDIRAs & Cost Segregation
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HELOC vs Cash Out Refinance and Tax Ramifications

Joe Wall
Member since 2022 · 7 posts · 4 votes

I currently do not owe a house, but my parents have thought about doing a HELOC (home equity line of credit) to help me buy a side-by-side duplex. I am wondering about all the details for a HELOC. I was told it can only be 80% of the house's value. So like $300,000 would be $1800 plus 5% I'm told to repay back the mortgage. Then, I would be doing a cash-out refinance of the HELOC. What are the tax implications of this?

I guess my biggest goal is to figure out how much per month it would be for a $200,000 to $250,000 HELOC to put towards a duplex. How much would I need to pay back my parents per month?  What are the tax implications?

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

    One interesting case in this situation is that your parents will be the one taking out the loan.

    There then would be a loan agreement between your parents and you.
    Your parents may potentially have taxable interest income in this situation.

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  • Ashton Karp
    Real Estate Agent · Bonney Lake, WA · Member since 2020 · 40 posts · 27 votes
    3y

    From a purchase loan perspective, with any conforming mortgage you are not going to be allowed to have your down payment be anything but guaranteed funds that are verified as yours or a gift from a family member.
    In other words, in order for this to legally work your parents would need to give you the funds required and a signed note saying they are not expecting repayment of the funds and that it is a gift. I believe you can receive monetary gifts from family members without needing to pay income tax but I would ask a CPA for your clarification. 
    Other options are VA loans (0% down required), DPA programs, 3.5% FHA loans, or low downpayment conventional loans.
    I am not sure where you are shopping for a home but in my market you can get closing costs covered by sellers and in conjunction with a DPA program, you can purchase a home with no money out of pocket. 
    Let me know if you have any follow up questions and best of luck!

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