Cash-out refinance on apartment building tax question

Rental Property Investor · NJ · Member since 2018 · 2 posts · 0 votes

I live in NJ & bought an apartment building 12 years ago for $1M and put down $250K. I now owe $450K on the loan.If I refinance the property now valued at $1.7M and we can pull out $750K in equity with the refi, what are the tax implications? Is there a strategy that anyone can reccomend

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Alina Trigub

Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes

@Bruce Raphael From what i have known you don't pay taxes on a loan. Perhaps @Lance Lvovsky can elaborate a bit on the interest tracing rules as it sounds like something that may potentially be applicable.

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Lance LvovskyPro Member
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
8y
There are indeed tax implications. This would be a great question for your CPA.
On a cash-out refinance, the deductibility of the interest is subject to the interest tracing rules. You need to be mindful of that, and develop a strategy to ensure you can deduct interest.
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Carl FischerPro Member
Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
8y
@Bruce Raphael
No tax on the $750k. My cpa has all the interest deductible on my loan. Great strategy especially if you use the cash out for more investment deals which hopefully increases ROI. It unlocks capital.
[email protected]215-283-2868
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Alina Trigub
Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
8y
@Bruce Raphael From what i have known you don't pay taxes on a loan. Perhaps @Lance Lvovsky can elaborate a bit on the interest tracing rules as it sounds like something that may potentially be applicable.
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Bruce Raphael
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Rental Property Investor · NJ · Member since 2018 · 2 posts · 0 votes
8y
Thank you Lance, Carl & Alina for replying to my question. I am new to BiggerPockets so I was not sure what to expect. This information was helpful and I am looking into the details surrounding the refi. I am active in Monmouth County NJ which is a pretty hot market so if you are interested in working together on multifamily investment properties please contact me. I own a few multifamily properties and I am actively seeking properties to add to my portfolio. While I have been working with a few local investors, I am always open to share in new deals and new projects with like minded people.
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Thomas D.
None · Member since 2018 · 26 posts · 6 votes
8y
@Bruce Raphael Hi Bruce. I'm a prospective investor and hoping to enter the multifamily space in the near future. I haven't done extensive target area research yet, but I'm currently located in Monmouth county and was hoping to get starting in the North/Central Jersey region. Would be thrilled to link up and talk about multifamily deals if you are interested.
-Tom
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
8y
@Bruce Raphael ,
Just to clarify.
1) Your original internal deduction on the current loan amount is not affected. You would still get to deduct the interest related to 450 k loan against your rental income.
2) The additional loan that you will take when you take out 750k in equity is what you will have to decide. The interest on this additional loan is only deductible if the loan is used in the business or investment activity. So if you use half to buy another rental property, so half the interest rate would be deductible. If you use remaining half for personal purpose, the interest is not deductible. That is why you have to trace the interest on where it is used.
3) If you have another trade or business and deposit the money in the business account, there is an exception on not having to trace the interest if you have used the proceeds within 30 days. I dont know your intention, so talk to professional.
[email protected]941-914-7779
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David Wright
Lender · USA · Member since 2013 · 186 posts · 97 votes
8y
Bruce, that is a very good question and to be honest I do not know the exact answer. I would always contact a CPA in this field. But when you find the answer please post it for us. Thanks.
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