Financial Scenario…HLS Primarily targeted at you

[myito]

I have the following financial scenario and wanted to get feedback from those working in the mortgage business.

I am truly facing this decision.

1) Have 300K cash and Have 250K equity from a property I bought in 1996 (plan to keep as a rental)
2) Buying a home and considering the best way to finance (e.g. 20% down cash, 80/10/10 Jumbo using own cash for 10% or using equity from property, 20% down using equity from existing property)
3) get killed every year on taxes because of income and not enough deductions

I’m interested in hearing opinions of what others presented with this scenario would do. I’m particularly interested in hearing from HLS.

Not really interested in hearing the mass sentiment either, I have decided to buy and it is absolutely the right time for our family. Also, not in denial about the state of housing, but we have a history of living in our homes for some time so staying put for 10 years is our plan.

[HLS]

MYITO…

I’d be glad to discuss your situation with you privately.
Please email me your contact info at [email protected]
and post that you did so I can look for it.

One IMPORTANT thing that you need to realize is IF #1 above is your current primary residence (OR if you lived in it for 2 out of the last 5 years) you need to figure something out, esp since you are getting killed in taxes.

One of the huge benefits of rentals is depreciation of the dwelling over 27½ years, based on your COST.

For you to turn a 1996 cost basis property into a rental may not be in your best interest. You cannot depreciate the land. Your dwelling probably has a very low cost, which will result in a very small write off.

With your equity position, you will also be getting a poor return on your equity, and may in fact create more taxable income from this rental, rather than a write off.

IF this is your primary residence, you have a TAX FREE exclusion of $250K or $500K (if spouse on title)
You may be better off selling the property now, and reinvesting in multi units with leverage that could take your cost basis of 1996 ($200K ??) to something closer to $1 million, creating a MUCH larger write off of depreciation, with multi units and MUCH better income.

The only downside is that it does increase your property taxes, but it’s all a write off with a rental, and IF you believe in future appreciation, you may be rewarded handsomely for the risk.

The above scenario depends on your overall financial situation and I urge you to discuss this with your CPA as there are write off limits based on your income, but they are carried forward.

Many people do great by turning a primary residence into a rental, but they are really limiting their risk/reward if they have a large amount of equity, and low cost basis and could do MUCH better.

The tax free exclusion of $250k/$500k is a powerful incentive to want to cash out and possibly use the cash more wisely, even being conservative.

In general, you will be better off with a down payment of at least 20%, and an 80% 1st to avoid a higher rate 2nd.

I’d like to talk to you about your tolerance for risk and overall financial situation. [email protected]

[myito]

I just sent you a message.

Thanks for your thoughtful feedback. I’m really trying to understand if it is better to pay the 7.25% interest on the HELOC and continue investing cash elsewhere like the stock market or even just holding cash for liquidity/investment in additonal property later.

Look forward to your comments.

[HLS]

Myito,,
You have mail… Thanks.

[HLS]

Myito,,
You have mail… Thanks.

[myito]

I just sent you a message.

Thanks for your thoughtful feedback. I’m really trying to understand if it is better to pay the 7.25% interest on the HELOC and continue investing cash elsewhere like the stock market or even just holding cash for liquidity/investment in additonal property later.

Look forward to your comments.

[HLS]

MYITO…

I’d be glad to discuss your situation with you privately.
Please email me your contact info at [email protected]
and post that you did so I can look for it.

One IMPORTANT thing that you need to realize is IF #1 above is your current primary residence (OR if you lived in it for 2 out of the last 5 years) you need to figure something out, esp since you are getting killed in taxes.

One of the huge benefits of rentals is depreciation of the dwelling over 27½ years, based on your COST.

For you to turn a 1996 cost basis property into a rental may not be in your best interest. You cannot depreciate the land. Your dwelling probably has a very low cost, which will result in a very small write off.

With your equity position, you will also be getting a poor return on your equity, and may in fact create more taxable income from this rental, rather than a write off.

IF this is your primary residence, you have a TAX FREE exclusion of $250K or $500K (if spouse on title)
You may be better off selling the property now, and reinvesting in multi units with leverage that could take your cost basis of 1996 ($200K ??) to something closer to $1 million, creating a MUCH larger write off of depreciation, with multi units and MUCH better income.

The only downside is that it does increase your property taxes, but it’s all a write off with a rental, and IF you believe in future appreciation, you may be rewarded handsomely for the risk.

The above scenario depends on your overall financial situation and I urge you to discuss this with your CPA as there are write off limits based on your income, but they are carried forward.

Many people do great by turning a primary residence into a rental, but they are really limiting their risk/reward if they have a large amount of equity, and low cost basis and could do MUCH better.

The tax free exclusion of $250k/$500k is a powerful incentive to want to cash out and possibly use the cash more wisely, even being conservative.

In general, you will be better off with a down payment of at least 20%, and an 80% 1st to avoid a higher rate 2nd.

I’d like to talk to you about your tolerance for risk and overall financial situation. [email protected]

[Author]

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