Can a cash-out refinance mortgage on one property be written off from another?

4 Replies

Two questions, for those in the know:

1. I currently own my house in full, mortgage. It would appraise at roughly $300k.

I'm considering buying a new property (currently rented out), refinancing this house by taking out a $180k loan on it. In addition, I'd take out a smaller mortgage on the rental property. 

When I read the IRS rules, my understanding is that *any* loan used to purchase investment property can have interested/points deducted from rental. So in theory, I could deduct both mortgages' interest from rental income on the new property -- is that correct?

Next: sometime 2--3 years from now, we would occupy the rental house and rent out (or sell) our current house. Would writing off *both* mortgages from the new rental investment prevent us from writing off either of them on our current house, should we ultimately rent that out?

2. How is building cost (for depreciation) assessed? Is it based on tax value of the property, or on "cost of building replacement" for insurance? Or neither?

Thanks! 

The total costs of financing a new property may be allocated to that property regardless of the collateral used for the loan(s). Points are pre-paid interest and amortized over the life of the loan.

You cost basis for depreciation is from your costs of acquisition as may be allocated, less the fair market value of the land if that value is not stated in the purchase contract, which you should do, state the value as opposed to claiming a valuation or using an assessed value that would usually be lower. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Bill Gulley :

The total costs of financing a new property may be allocated to that property regardless of the collateral used for the loan(s). Points are pre-paid interest and amortized over the life of the loan.

You cost basis for depreciation is from your costs of acquisition as may be allocated, less the fair market value of the land if that value is not stated in the purchase contract, which you should do, state the value as opposed to claiming a valuation or using an assessed value that would usually be lower. :)

 Thanks for this. What would happen if we moved into the new purchase, rented out our current home, and wanted to deduct interest from the loans? Would we have to refinance?

For the new property the home value is probably ~$600k, but I'd get it for around $470k (it needs updates, but has enormous square footage and great fundamentals). Land value is $223k according to tax records. 

How would I go about stating the value of the land in my P&S contract?

Thanks!

It is agreed that the purchase price shall be 600,000, 200,00 for land and 400,000 for improvements.

Just had a good thread up this am on conversion of rental properties and capital gains, it covered the tax requirements for rentals to primary. The interest and loan expenses allocated to investments would cease and become interest under your personal home if secured by that home. Or, become a business deduction, interest expense on the new rental if it is financed. While I'm an accountant/auditor, I'm not a tax guy any more, check out the other latest thread! :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Can I really write that into the P&S and have the IRS refer to that, as opposed to tax valuation by the county? That seems dubious...