Hi, I asked this question on the lending board, but it may be better suited for this board
I am looking at an equity loan on my primary and using it to pay cash for a duplex. I already know that I can do this, but can I take the interest deduction from the equity loan and apply it towards the rental property at tax time? I don’t see why that I should not be able to, It’s not like I am double dipping, and I just want the deduction for the rental instead of the primary. Does anyone have any experience with this? If it matters, before i do any of this, I am going to open a DBA and all of my rental accounting will be done through that.
I Have been reading the boards and I know that a lot of you dont recomment useing your primary to invest in rentals. The position that I am in is going to allow me to get an equity loan and borrow enough to purchase the rental and also pay off the little that I owe on the primary and end up still having only one mortgage payment for now. The payment will only be about $100 a month more than I am paying on my primary so I could afford to pay the loan myself if need be. I don’t think that I can get in too much trouble this way. Am I missing something.
Since you are using some of the cash out from your home equity loan to pay down the debt on your primary residence, the interest on this portion of your loan will still be considered home mortgage interest which is deducted on Schedule A if you itemize.
If the entire balance of the cash out from your home equity loan is used to purchase a rental property, then the interest for that portion of your loan is properly expensed against rental income on your Schedule E.
You could wait until tax filing time to deduct the mortgage and equity loan interest or you can advance it to yourself by taking all your interest 1098 deductions and dividing it by $3200. The result is the number of exemptions you can claim on your W4. You’ll get more net from your paycheck and use that to pay down your mortgages.
Important: DO NOT use the extra money for spending. Put it all back into your mortgages!
Thanks, I seem to be getting A differance of opinion on weathe I can take the interest deduction from the equity loan on the schedule E or not. I guess I need to speak to a CPA to get me heading in the right direction. I am not looking for extra spending money right noe, I would like to acuire a few properties over the next 15 years and retire from my construction job to manage the properties full time and have some income to supliment my pension check every month.
No, you did not get a difference of opinion. Deal Hunter was trying to tell you that if you are lowering your taxable income with a higher mortgage interest deduction, you can file a new W-4 with your employer to reduce the amount of income tax withheld from your salary during the year. If you estimate correctly, you will have more discretionary income in your paycheck each month and a very small income tax refund next April
While the suggestion is valid, Deal Hunter did not fully appreciate the scenario you described. You are using the borrowed money to invest in an income producing asset. The interest paid on the borrowed money is netted against rental income on Schedule E and probably won’t reduce your taxable income at all because we know you will only invest in a property that generates a positive pre-tax cash flow.
Before you consult a CPA, refer to Table 2, Pub 936 which says
If you have deductible interest incurred to produce rents or royalties, THEN deduct it on Schedule E (Form 1040), AND, for more infomation go to Publications 527 and 535.
Now, if you are still confused, get specific guidance from your CPA,
Dave, Thanks for clearing that up. I did not mean that I was getting a differace of opinion just on this site, I have been asking others that I know in the business as well. I will read the refrenced material, and again, thanks for taking the time to answer. Nate
the reason I don’t recommend people using HELOC to purchase rentals is that if something goes terribly terribly wrong with the rental, then their home is at risk.
foreclosure on a rental, while bad, is much preferred over foreclosure on your residence.
That was much clearer from Dave. However, I thought that the HELOC interest (1098) is deducted on Schedule C (since it is on the primary res) and up to $25K of Schedule E losses can be applied against adjusted gross income? This is what our CPA has been doing for us for 6 years. ???
you wouldn’t put the HELOC interest on Sch C unless you used the proceeds for the Sch C business. Interest gets reported wherever the money was used. Business = business. Rentals = rentals. Everything else = Sch A.