"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:
- quote -

OP's number are extremely simplistic, and ignore a lot of
things that add to the value of owning real estate. For
example the mortgage "cost" includes paying down of
principal, which he banks but does not currently recognize.
Real estate generally also appreciates in value, so he gets
the multiplied value of that, since the increase is based on
the full value of the property even though his down payment
was only a fraction of that amount.

Additionally, all the payments for mortgage interest, costs
of upkeep, etc., are deductible from taxable income, though
when the place is sold most income will likely qualify as
capital gain and as a result will be subject to taxes at a
lower rate.

Stu

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Newsgroups: misc.taxes.moderated

In article <fcils8$82r$1[at]panix3.panix.com> ,
HW \"Skip\" Weldon <skip5700removethis[at]hotmail.com> wrote:
- quote -

Inflation is in the debtor's favor; he pays back the loan with cheaper
dollars. (Income and costs other than mortgage rise together.)

Seth

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ethb[at]panix.com (Seth) wrote:

- quote -

Before you rush out to borrow those billions, remember that
the OP said the 2.5% was before property taxes, insurance
and maintenance costs. Also, what about inflation - are we
assuming 0?

-HW "Skip" Weldon
Columbia, SC

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way111[at]gmail.com wrote:

- quote -

Likely, the OP understands his area, the rental market, etc.
Given his ability to own his home outright, and have a
rental fully paid for, the breakeven doesn't look bad. Look
at it this way, he will have two units, which, combined,
give him positive cash flow. The 'negative' result of this
purchase would keep his income from the first from being
taxable. Any gain in value or increase in rent is profit to
him. Think about this, had he not aggressively paid off his
home and the first property, and saved that money, he could
put a downpayment of 30%+ and have the property he's buying
look like a positive flow from the beginning. (disclosure -
I owned 4 rentals, had bad experiences, and now have just
one. I made all the mistakes the OP seems to be avoiding,
overleveraged, bad tenants, etc. I was young and stupid)

JOE

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<fc4i65$ii6$1[at]panix2.panix.com> wrote:

- quote -

Tax considerations are never aside, especially in this
newsgroup.

- quote -

2.5% of _what_? If I can make a 2.5% margin on borrowed
money, I'll do it in the billions (if I could).

Seth

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On Sep 10, 6:58 pm, komobu <curra...[at]gmail.com> wrote:

- quote -


Tax considerations aside, this doesn't seem like a very good
investment to me.

$1200/month * 12 months = $14400

$14400/$170000 * 100 = 8.5% gross return on your investment.

The mortgage is going to cost you around 6%, so now you are
down to a 2.5% return.

Subtract property taxes, insurance, maintenance, and
possibly utilities, and I bet you are left with a negative
return.

And, this assumes a 100% occupancy rate.

So, this investment will likely only break even or cost you
money out of pocket every month on a cash flow basis, with
your only real return being the tax deduction from the
depreciation. At your incremental rate, even this isn't
worth that much.

Unless you have strong reason to believe that the property
will appreciate in value substantially (which in the current
housing market seems unlikely), I'm wondering why you want
to do this deal. The numbers don't work.

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komobu <curra...[at]gmail.com> wrote:

- quote -

Deductibility of interest is determined by tracing what you
are using the proceeds for. With Option A, the interest on
both loans would be deductible against expenses on the new
170k property, because this money was used to acquire the
new rental.

With option B, because you are using your home as collateral
for the loan, the interest can be deducted either on
Schedule E of the new rental you are acquiring or split
between Sch. A and Sch. E. If you choose to deduct some of
the interest on Schedule A, only the interest on the first
$100,000 can be deducted. This is because the money is not
being used to acquire a personal residence or add on to a
current residence, so it is considered a home equity loan,
which is limited to $100,000. The remainder of the interest
can be deducted as an expense on Sch. E for the new rental.
One reason for doing this might be to reduce the loss on a
rental. Passive losses are limited to $25,000/ year on
rentals for most taxpayers, so if your loss is greater than
this, you can deduct some of the interest payments on Sch. A
rather than have to carry the passive loss forward. Of
course, this depends on what other deductions you might have
for Sch. A. However, once you choose a method of how to
deduct the interest (Sch. A vs. Sch. E, or both) you must
continue that method for the life of the loan.

In terms of losing your home, if you have a catastrophe, you
could try to sell one of the rentals to pay off the loan, or
take out a loan on one of the rentals to pay off the loan on
your home. If you end up in bankruptcy, your primary
residence is usually exempt from being taken.

Dennis

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komobu <curra...[at]gmail.com> wrote:

- quote -

You have a fundamental misunderstanding of the "Tracing
Rules" for mortgage interest. If it's any consolation, I
have yet to meet a civilian (non tax pro) who understood
them - Sadly, I've met far too many tax pros who either
don't understand them either or fail to apply them.

The Mortgage Interest Tracing Rules REQUIRE you to trace the
usage of the mortgage money and report the interest expense
on the most appropriate form. So in in either of your
examples you need to allocate the interest between the two
rentals and claim the mortgage interest on the appropriate
Schedule E.

In your option A, even though you have two properties
mortgaged, the interst on the $170K goes on Property B and
the interest on the remaining $4,500 from property A stays
on property A - EVEN though you've mortgage property A to
buy property B.

In your option B the mortgage interest would get reported on
Schedule E for property B. Otherwise, you'd be limited to
deducting the interest on NO MORE than $100K - this is the
deductibility limit on home equity loans. Since you have no
mortgage on your home if you borrow $170K you can only
deduct the interest on the first $100K on Schedule A anyway.
Compound this with the Alternative Minimum Tax Requirement
that you add back the Home Equity Interest when you
recalculate your AMT and you'll find that you get very
little benefit from putting the mortgage interest on your
Schedule A.

BUT since we are required to trace the use of the funds and
the funds were used to buy a rental ALL of the interest can
go on Schedule E so don't have a deduction limitation and
you will likely avoid the AMT trap altogether.

Whether you use Option A or B is a decision that is not just
a financial one. You don't give us enough information to
make a real tax recommendation, that would take a lot more
info - your age, marital status, state, tax bracket, etc.

However, I agree that not having your home encumbered is a
big (NONFINANCIAL) plus - I like this. This is a vote for
Option A.

But considering you'll get an above the line tax benefit
either way, paying less is always better than paying more.
So this is a vote for Option B.

I would recommend you consult with a local tax pro with real
estate experience AND a local real estate attorney in your
locality and see about:

Setting up LLCs to hold the rentals - this could help limit
your personal liability; Using Option B to loan the money to
the LLCs that hold the property - you may be able to
encumber them with a mortage from YOU!, but you really need
legal guidance on this. I do NOT know if this will work.

Good luck,
Gene E. Utterback, EA, RFC, ABA

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komobu <curra...[at]gmail.com> wrote:

- quote -

Well, the best answer to this question is to compute the
taxes both ways and compare.

BTW, you didn't indicate what your filing status is, which
has some bearing on the answer, but here's some quick
calculations. The 170k loan will have interest of about
$9,800 (5.8%) or $10,700 (6.3%). So that is roughly the
amount of the standard deduction for MFJ, which means that
you wouldn't get any direct benefit from itemizing (although
it would make other itemizable deductions such as state
income tax, property tax, etc. worth itemizing).

So, if you don't have any other significant itemized
deductions, you may be better off tax-wise to use the rental
properties for the mortgage, especially since the difference
in interest is only about $900/year and dropping each year.
So the question then becomes, will you save at least $900 in
taxes the first year?

Hmmm, with $50K income and the potential depreciation, you
might not actually save that much given that the rental
write-offs could easily reduce your income tax to zero.
That really goes back to the first point, namely that you
would need to do at least a rough calculation of your taxes
under both scenarios.

And there is, as you mention, the peace of mind issue. How
much is that worth to you?

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komobu wrote:

- quote -

For the numbers you are talking, the difference may depend
on the missing details, such as what other Sch A deductions
would you have? Property Tax, State tax, etc. You say with
no morgage on your home, you wouldn't itemize. But do you
'just' miss it? How much would the two closings cost you?

I'd offer an Option C: Finance the new rental on its own for
the 80%, but arrange for a home equity line to fund the 20%.
You then could use the extra rent to agressively pay off
that equity loan, and still have it available for the next
deal. You should be able to find a no-cost HELOC to take
care of this.

I understand the good feeling a home with no mortgage would
bring, but I'm not so sure you are as protected as you
think. You are still liable for the two rentals, unless
you've considered puting them into an LLC. Good luck, JOE

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I need some Tax Advice for rental property. My primary
residence is in Va. I paid off my home last month and it is
valued at about 250k. I also own a rental and it is valued
at about 140k. I currently owe 4500 on it and it will be
paid off next August.

I am thinking about buying a second rental for 170k. I am
not sure the best option for financing it. My credit is
excellent. Here are my options:

Option A: I can finance 80% of the 2nd rental (135k) [at] 6.3%.
I can then do a cash-out refinance of my first rental
property for 35k at 6.3%. The positive side of this is that
come tax time, I can take the standard deduction since I own
my primary residence free and clear. I can also deduct all
my mortgage interest paid on my "Schedule E" thus I am
writing off interest against my rents received. Another
positive is that my home has nothing against it thus it is
somewhat safe in case of a major catastrophe. The negative
side of this is that I would be doing two closings since I
am using two properties to come up with the 170k and the
interest rate is 1/2 point higher since it is investment
property.

Option B is for me to take out a mortgage for 170k from my
primary residence. The positive side of this is that I can
get the loan at 5.8% instead of 6.3 because it is my primary
residence and not an investment residence. I would then own
two rental properties free and clear. The negative side
would be that there are no interest that can be deducted
from the rents received on the "Schedule E" I would have to
itemize and I could only write of the interest against my
primary residence, thus the Standard Deduction would no
longer be available to me. Another con is that I now owe
money against my primary residence and in case of a
catastrophe, I could loose my home.

My yearly income from wages would be about 50k not counting
rental income My first rental would rent for about 800 per
month My second rental would rent for about 1200 per month.

Please provide any additional insight that I may be missing.
Also, please advise any tax issues if known and recommend
weather you think I should go with Option A or Option B.

Thanks
Pat

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