the idea to payoff rental sounds exciting..but I am worried about the taxation..is it possible to deduct interest payments (approx 35%) when I file taxes in 2021?
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
6y
My pretty aggressive cpa shot this idea down as I don’t declare my primary home interest (it’s less than the standard married deduction.) if this was argued/allowed you could declare any loan on your primary was really on a rental. (I wanted to lower the rate and the number of loans.)
Get your cpa on board and I think you’re golden. Otherwise let it go. You could get a better rate on your rental by converting it to a 15 year if you’re comfortable with the payment.
Since the interest rate on the rental is higher(4.375) compared to primary (2.875), I was thinking if I can payoff the rental with cashing out my primary residence...It will yield full cash flow and all of the cash flow will continue to contribute to my primary loan. And this refi is with 0 closing costs and no points.
Hence the thought...
Will there be any complications while tax filing on how much tax to write-off ...since all the loan is on my Primary...even though a part (35%) of it is for rental.
Real Estate Investor · Chattahoochee, FL · Member since 2014 · 133 posts · 107 votes
6y
The tax question is the key. I don't know the answer, but wouldn't you get the benefit of taxes paid on two properties as part of your overall debt burden instead of being limited to just one? Additionally, the % is cheaper so that's a consideration, but does it increase your overall bottom line in the long-term? Better ROI? While you offered some details, monthly payments would be interesting to see. Does that number drop per month. Also, your unit that is no longer in debt still would need to pay down part of your mortgage no matter how you "assign" the income. At least in my mind. If you can get your accountant to answer the tax question for you I think you'd have your answer quick with the other details. Then see how it aligns with your goals etc. It is nice to have a paid off property. that's one way to go about it.
Since the interest rate on the rental is higher(4.375) compared to primary (2.875), I was thinking if I can payoff the rental with cashing out my primary residence...It will yield full cash flow and all of the cash flow will continue to contribute to my primary loan. And this refi is with 0 closing costs and no points.
Hence the thought...
Will there be any complications while tax filing on how much tax to write-off ...since all the loan is on my Primary...even though a part (35%) of it is for rental.
Please provide your valuable inputs
It doesn't work like that. As I said in the beginning. You're not the one paying the mortgage on the rental now...you're tenant is. If you use refinanced money to pay it off, you will then be the one paying it...and still paying the refi loan too.
In the end, by using the refi funds to pay off the rental property loan, you'll be paying for two mortgages instead of just one.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
6y
My pretty aggressive cpa shot this idea down as I don’t declare my primary home interest (it’s less than the standard married deduction.) if this was argued/allowed you could declare any loan on your primary was really on a rental. (I wanted to lower the rate and the number of loans.)
Get your cpa on board and I think you’re golden. Otherwise let it go. You could get a better rate on your rental by converting it to a 15 year if you’re comfortable with the payment.
This is my first investment property and I only bought it last April, until this year I did my taxes, so, no CPA to help answer my questions...
Just FYI, the payments on the loans are below
primary - 2500 (P&I)
rental (bought for 235k) - 890 (P&I)
there is about 300$ cash flow now
refi to one loan at 2.875, the payment will be approximately same (4100) including escrow for both.
Since the payment was also on the same lines, my immediate thought was to payoff...but if it doesn't make sense or if I can't write-off the taxes...I would not combine them.
thank you all again for all your valuable information.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
6y
NP. Look up the payment and rate for changing the rental to a 15 year. Shouldn’t be a bunch more monthly, especially if you drop more than 1/2 a point in interest. If you want to see a big number, run the amortization tables for both loans.
Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
6y
I know this is not what you are asking, but done right you will make more money if you do cash-out refinance the primary resident with 30-year fix mortgage, and use the money to buy more rental properties.
Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 934 votes
6y
You have deductible mortgage interest today coming from your rental. That effectively lowers the mortgage rate you are paying.
I believe your primary mortgage interest + state/local taxes must be below $10,000 to be fully deductible and you have to overcome the standard deduction value to get practical value. Check your situation to see if that is the case.
You just need to mathematically model your options and see what comes out the best.
I am skeptical of your statement that the refi is with $0 closing costs and no points. There is always a cost - you just don't know where it is yet. My bet is your lender is telling you there is no up-front cost because the expenses will be added to your loan. You will be paying for the refi unless your lender and everyone involved are charities.