Tax advantage of equity on home? - Posted by Marlene

Posted by JHyre in Ohio on November 28, 1998 at 06:51:28:


Whether you finance with the equity on your home or put a mortgage on the rental property itself, you get a deduction. Last I looked, the “home equity” deduction is limited to loans of $100,000 or less. If the rental is priced at $100,000 or less, your financing options both get the same tax treatment.

I would therefore make your decision based on the pure economics. Home equity loans are easy to get, flexible and can generally be used for anything. As such, I would keep the home equity line open so that it may be used for “unconventional” deals in the future. My guess is that the interest rates offered on home equity loans are about the same as on investment mortgages.

Tax advantage of equity on home? - Posted by Marlene

Posted by Marlene on November 27, 1998 at 21:10:17:

My husband and I are using the equity in our home to finance a rental property. We have enough equity to pay for the entire rental property. We’d like to know if there is a tax advantage to using our equity to buy the entire unit free and clear, or if we should use part of our equity to get into the rental unit and then mortgage the rental unit for the balance of the loan.
Also, is there a typical discount for offering the seller ALL cash? Aren’t most deals all cash? If someone has to take out a loan to finance the property, I don’t see why it wouldn’t be considered ALL cash.

Deep discount - Posted by Bud Branstetter

Posted by Bud Branstetter on November 30, 1998 at 13:22:22:

Don’t remember where I heard it but I follow a 60% rule. If I am going to pay all cash I pay no more that 60% of fair market value. I also follow a 2 for 1 rule. Two dollars of equity for each dollar I put in the deal. If you make your money going in then the return on your investments becomes very high. It can become greater if you sell that rental property(acquired for 60%) to a new buyer with an 80% or more cash out and cash flow.

I personally would not prefer to have my home pledged for a rental property. Of course in Texas home equity loans are limited to 80%. But if it is your only source of cash for a deep discount deal then you have to judge.

Re: Tax advantage of equity on home? - Posted by JPiper

Posted by JPiper on November 29, 1998 at 10:01:33:

Your tax question, in my mind, should be addressed to your CPA, so that it may be answered given your personal circumstances.

If memory serves, and it may not, the tax deduction on a mortgage on your personal residence is limited to your cost basis. Please check this with your CPA. Further, mortgage interest deductions on your personal residence should be viewed in light of the existing standard deduction. Mortgage interest only takes on value to the extent that it exceeds the value of the standard deduction. This analysis can’t be made without knowing your personal circumstances.

Personally, I would prefer to finance a rental property directly than through an equity or credit line. If I purchased a property using the equity or credit line, my preference would be to refinance to take the property off that credit line, thus freeing the credit line for additional purchases.

When you think about it there typically shouldn’t be much of a discount for all cash versus giving the seller cash obtained via mortgage. It’s still cash. If you were preapproved by a lender you’re ALMOST like a cash buyer. However, in terms of motivated sellers, a cash purchase has the advantage of SPEED…the ability to close quickly within days. None of the typical delays associated with dealing with lenders such as the time for appraisal, underwriting, etc. While these delays don’t have to be particularly significant, to a motivated seller they might be. In any case, the terms “cash” can take on an importance in a seller’s eyes that can result in a more significant discount than probably should be warranted. It’s worth using to your advantage.


Re: Tax advantage of equity on home? - Posted by Tim Pannabecker

Posted by Tim Pannabecker on November 29, 1998 at 08:18:10:


It is my oppinion that a RE investment should financially support itself. With that in mind I would not encumber my personal residence for business purposes. I am sure that many may disagree with this philosophy, but you said that you could finance the property with the investment as collateral. This is a strategy of asset protection not tax implication.
The other question was what significance a cash offer has over financing. When you buy with cash, the deal is more certain, not contingent on financing and is closed more rapidly. Cash deals are particularly valued by motivated sellers.

Best of luck