New Tax Reform Refinance my inv properties and payoff primary res

6 Replies

Based on the proposed Tax Reform with the substantial increase of the Standard deduction would it make more sense to refinance my investment properties as a cash out and payoff the mortgage on my primary residence. It will allow me to increase the business expenses claimed by the two LLCs and I will just claim the standard deduction. Any advice?

@Emil Matov

Good thinking. Not sure because I don't know what the law will be. I am impressed with the ingenuity you show while many others wring their hands and worry. It is the cost of doing business in the USA. 

@Emil Matov - welcome to Bigger Pockets.

Paying off your personal residence is a personal expense. You can't claim a business deduction for personal expenses. The interest on the refinance loans on your business properties that was used to pay off your personal residence would be subject to interest tracing rules.

I like the creative out-of-the-box thinking, but in this case it would not be a legal business deduction.

Best of Luck with Your Real Estate Investments!

paying down a loan or mortgage is not an expense(business or personal). you are simply decreasing your liability from X to Y.

Maybe my question isn't clear. Here is an example which reflects the situation but not the numbers. I have a mortgage of $200K on my primary residence. I also have two investment properties with mortgages and around $120K worth of equity if I only take 80% out at a cash out refinance. After all is done each property will carry a mortgage of around $100K. The investment properties will still clear around $600 a month as the investment property mortgages will go from about $50K to $100K each.  The mortgage for my personal residence will drop from $200K to below $100K. I will not itemize anything on my personal tax return and instead will take the standard deduction of $26K for married couple.

Originally posted by @Basit Siddiqi :

paying down a loan or mortgage is not an expense(business or personal). you are simply decreasing your liability from X to Y.

True. I got a bit sloppy with my terminology. 

The mortgage interest for OP's personal residence is a Schedule A personal deduction. The mortgage interest for his rental properties is a Schedule E business deduction. If I am understanding correctly,  OP wants to borrow more money on his business properties to pay off the loan on his personal residence.  Interest tracing rules do not allow deducting interest as a business expense if the money was borrowed for personal use. It doesn't matter what collateral is used to secure the loan, it matters what the money is used for. In this scenario it is being spent on a personal residence and therefore not deductible on Schedule E.

Thank you, Paul!

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