Financing and tax question: HELOC on primary for investment property, can it offset income?

[Coronita]

I’m too lazy to look this up so if anyone knows this off the top of their head, please let me know.

Please, I’m a little dumb and lazy right now..And I know..talk to a accountant..But if anyone knows, please let me know beforehand.

Hypothetical situations.

1)I believe the answer this question is yes…But I’ll ask anyway..

If I take out a HELOC on my primary resident and use that to buy an investment property, can my mortgage interest from my HELOC loan be used on schedule E to offset my rental income? I believe the answer here is yes.

2)I just want verification of the following..

If I cash out refinance my primary resident and use that extra cash to buy an investment property, from a tax reporting perspective, I’m already taking taking a primary mortgage interest itemized deduction on schedule A, so I will not ahave an mortgage interest that I can use on schedule E to offset the rental income… This I know… BUT….

Is there any difference in my overall tax bill if I do this versus if I were to take out a loan on the investment property and use that to on soffset rental income??

Ehh. Let me explain.

Is there any difference in my tax bill if I

a)Refinance and cash out an extra $200k from my primary with that extra $200k being 30year/4.0%, and deduct that extra mortgage interest deduction on my tax bill on schedule A….

versus

b)Take out a $200k loan 30year/4.0% on the investment property itself and use the mortgage interest paid on this loan on schedule E to offset my rental income (again, forget about costs of HOA/propertytax/etc)…

Is there fundamentally any difference between (a) and (b) from a tax bill perspective assuming that I can get the exact same loan terms for the $200k?

Sorry, I’m having a brain fart right now and too stupid/lazy to be reading and researching..

[Coronita]

delete.

[Coronita]

never mind. Used turbo tax and ran both scenarios.

Some things I discovered (someone can verify)…
Assumption. Your household AGI > $150,000

If in scenario (b), the rental produces positive income after rental deductions, there would be no difference between (a) and (b).

If in scenario (b), the rental produces a loss, you would end up paying more taxes with scenario (b) versus (a). Because in scenario (b), you cannot deduct the loss from your income if your AGI is > $150000 (it carries forward to next year).

In practice, (a) also ends up produce the better loan rate in most cases.

*If you get rental mortgage, they typically have a higher mortgage rate than non-rentals. And then if you end up borrowing less than $150k, there’s a surcharge for that too.

*Getting heloc obviously has the disadvantage of the possibility of a rate change. It also complicates things anytime your want to refinance your first loan. I guess the only advantage is that you can take advantage of the intial teaser rate, and that if you pay off the $200k early, you still have your original primary’s loan rate/payment schedule… Disadvantage is that if the investment property is really bad, you cannot simply walk away without risking your primary home.

*Refinancing/cash out on and taking the cash to buy the rental probably gives you the best loan rate for rental property. But if it bumps you from a conforming to a conforming+, then it might not be as cheap. Also, even if you wanted to pay off the $200k early, you’re stuck with the larger loan payment on your primary (even though you’ll end up paying it off earlier)…Also, similar to heloc, you won’t be able to easily walk away from the rental if you need too….

Comments?

[Coronita]

I forget this IRS rule…

If you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions.

Time to recalculate.

*edit*

There is no longer the 3% phase out rule… Never mind.. Had there been, you would have paid more taxes if you did option (a)

http://www.real-estate-owner.com/itemized-deduction-reduction.html

[enron_by_the_sea]

Flu:

With these income levels (AGI >150K if MFJ) one needs to be very careful in tax planning because they can fall under the dreaded AMT.

Under AMT rules, HELOC interest can only be deducted if it is used to buy, build or improve your (primary) house. AFAIK, if you used HELOC to buy investment property then you can’t deduct that interest if under AMT!

(If you have a lot of equity in the house and can manage to cash out without resorting to a HELOC then this does not apply!)

[Coronita]

[quote=enron_by_the_sea]Flu:

With these income levels (AGI >150K if MFJ) one needs to be very careful in tax planning because they can fall under the dreaded AMT.

Under AMT rules, HELOC interest can only be deducted if it is used to buy, build or improve your (primary) house. AFAIK, if you used HELOC to buy investment property then you can’t deduct that interest if under AMT!

(If you have a lot of equity in the house and can manage to cash out without resorting to a HELOC then this does not apply!)[/quote]

I could be wrong, but I think that if you used the HELOC of your primary, it depends on how you use the HELOC…

My understanding is that if you use the HELOC to buy a rental property, that you would be claiming the HELOC interest on schedule E for the rental property, not claiming it on schedule A (mortgage interest deduction)… Hence, I don’t think AMT affects the HELOC interest in this case, because on schedule E it would be considered rental expense.

I’ll ask a accountant coming week, but if anyone knows definitely they can chime in.

http://www.biggerpockets.com/forums/51/topics/39224-pay-cash-lose-your-tax-deduction-

http://www.reiclub.com/forums/index.php?topic=31080.0
(comment #6 by dave t)

[recordsclerk]

Flu,

Do you know where the best rates are for HELOC? It would be a non-owner occupied HELOC. Anyone can chime in.

Thanks

[Coronita]

[quote=recordsclerk]Flu,

Do you know where the best rates are for HELOC? It would be a non-owner occupied HELOC. Anyone can chime in.

Thanks[/quote]

I’m applying here, but you might not be able to because it requires membership…. I think I’m getting prime – 0.25 which is 3%

https://www.aerofcu.org/Loans-and-Credit/Home-Equity-Line-of-Credit.aspx

The only other place I was considering was Charles Schwab, but their rate was 4% Not bad, but not great.

I think US Bank is offering 3.99% but, didn’t investigate.
http://www.usbank.com/home-equity/index.html

[NotCranky]

I don’t have a heloc or a second but I used my first to build my rental(I was free and clear for a nano second). I can prove it and the interest is taken off against the rental income. So, unless my tax preparer is doing something wrong, you should be able to do the same with the Heloc?

[outtamojo]

Just glanced at this the other day thought it might interest you- not motivated myself to due diligence this.

http://slickdeals.net/f/4119849-1-99-Home-Equity-Loan-from-Pentagon-Federal-Credit-Union-PenFed-with-NO-Closing-Costs

[recordsclerk]

I just bought my primary residence this year with 20% down. I don’t think I have any equity to draw from the primary. I’m looking to draw equity from a rental that is free and clear to purchase another rental. The unit that I want to buy has low owner occupancy. It will probably have to be a cash deal for new property. I like the flexibility of the HELOC, but I can’t find one with a good rate for non-owner occupant.

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