Posted by Stew(NE) on October 30, 2004 at 19:07:37:
We will have to agree to disagree. My personal residence is paid for by money I earned from the J.O.B. It is a liability. By moving the loan to the asset side of the equation, the renters now pay for it. I will still get the deduction and depreciation because it is an expense. I really don’t understand your point of me losing the $1.00 and the 31 Cents. “You still have the mortgage interest to pay on the refinanced loan, but the mortgage interest is no longer deductible.” This is just flat out wrong. Like I said, let’s just agree to disagree.
Posted by Carl CA on October 31, 2004 at 06:58:34:
magega,
I can only assume you would be considering this for the “comfort” of
owning your personal residence free-and-clear. It doesn’t make sense
financially.
Let’s say you could refinance your rental properties and raise $100k
cash out. Instead of paying off your personal residence, why not take
the proceeds and invest in short term secured notes? If you pay 6.25%
for the new mortgages (rate I just paid), and invest in note partials at
10% interest only (what I’m getting), you’ll net a positive spread of
$218 per month, plus what you amortize on your rental notes. You’ll
also keep a reasonable level of liquidity with the notes, since they
typically turn over in 10-18 months. You’ll also maintain the tax
advantages of having a mortgage on your primary residence. If you
pay off your primary residence you’re just trading one debt for the
other, and you’ll likely be paying a higher cumulative rate for the
money with a negative effect on your cash flow.
So, it really doesn’t make much financial sense, unless your peace of
mind of owning a free-and-clear primary residence is greater.
Posted by Marc Donovan on October 30, 2004 at 21:49:01:
Borrowing on your residence is the cheapest loan you can do. Invest the money in real estate and you are almost guaranteed to net more money. Take the 5% (30 yr) loan and factor in 20% deduction (depends on your marginal tax bracket and whether you itemize) and you have the cheapest loan available. I don’t care who you are, that’s some cheap money (Larry the Cable Guy told me). Invest it anywhere and you will make a profit - except cd or money market of course.
Don’t invest in the stock market. We are due for a Major drop lasting 7-10 years, after one last hurrah in the next year or two. My other profession/hobby is Elliot Wave prediction.
refi rental to payoff personal residence? - Posted by Brent_IL
Posted by Brent_IL on October 28, 2004 at 17:36:36:
One other thing to consider is the value of your state’s homestead exemption. In Illinois it isn’t enough to be meaningful. In some states, like Florida, the entire homestead is protected against creditors.
Money held in cash or rental property equity wouldn’t fare so well.
Refinancing is a tax free event, insofar as the cash you receive is not income but borrowed money that must be repaid.
However, there are limitations on your ability to deduct the mortgage interest you pay on your new loan. Since you are planning to use the proceeds of the refinance to pay off the mortgage loan on your personal residence, I venture to say that you lose the mortgage interest deduction on Schedule E.
Because you are using the loan proceeds for a personal use, the mortgage interest is not an interest expense on Schedule E. Furthermore, because your primary residence is not securing the loan, you can not take the home mortgage interest deduction on Schedule A either.
So, yes there are tax impacts to consider.
As far as finances are concerned, you have to determine whether getting a non-owner occupied loan on your rental property is more cost effective than just refinancing the mortgage loan on your primary residence. I am told that a rate and term refinance on your primary residence qualifies for lower interest rates and fewer points than the same loan on an investment property.
If peace of mind in owning your home free and clear is your goal, then you have emotional reasons in play that may not lead you to the best business decision.
In the end, you have to do what lets you sleep best at night.
I say do it and move your personal residence into a irrevocable trust. Then you are covered in case of tenant lawsuit etc because you do not own the house
If putting your primary residence in an irrevocable trust causes you to lose control over the property, I would say be careful here. You might want to sell, but the trustee may disagree and refuse because his opinion of your best interest is served by holding the property.
Posted by Carl CA on October 31, 2004 at 10:30:38:
Gary,
I deal with a local loan broker who solicits private money to fund
residential construction loans. I own a percentage of the project,
based on how much I invest and the total value of the loan. I get
recorded on the deed as owning a partial interest of the security (the
property and partial completed construction). The builder makes
draws from the loan proceeds as the project progresses, never
exceeding 75% LTV of the liquidation value of the project. I release my
security interest when the loan pays off.
Been doing it for a couple of years now, and it’s been working great.
I beliefve you are dead wrong. Interest is not deductable on a rental property refinance when the loan proceeds are used for personal purposes. I wish it were otherwise but it simply ain’t so.
Re: refi rental to payoff personal residence? - Posted by Stew(NE)
Posted by Stew(NE) on October 28, 2004 at 14:50:29:
I was thinking the same thing. Also, I was thinking that this would be a great idea, if you had enough equity in the rental that you could still get a positive cahflow. Effectively, you just removed a liability (Your house) and allowed the renters to pay for it. I hate the argument of losing the tax deductions, that sounds like something my accountant would say. I can get rid of paying $1.00 each month, but then he would say, “you lose the chance of getting back .31 cents at the end of the year.” Hello!!! I lost 69 cents in this deal.
Looking at the total after tax cash flow, you lose not only the $1, but also the 0.31 tax saving. You still have the mortgage interest to pay on the refinanced loan, but the mortgage interest is no longer deductible.
True, the primary residence would be free and clear, but the rental property would now have a mortgage for the same amount as the previous loan balance.