What are the tax implications of refinancing a rental property?
With and with out a LLC?
Does no one have a response? Or has no one ever refied a property in a business form?
Phil
Note: the following comments only apply to the specific situation of a cash-out refinance of an investment property.
Borrowing money is not a taxable event, so borrowed money that must be repaid is not taxable as income. Refinancing does not affect your cost basis, nor, is the mortgage balance (or lack of one) used to compute your taxable capital gain when the property is sold.
The tax treatment for the mortgage interest depends upon what you do with the money.
Ordinarily, when you purchase your rental property, mortgage interest on acquisition debt is a deductible expense against rental income. But, when you refinance your rental property, the loan proceeds must be used for a valid investment purpose for the mortgage interest to be deductible.
Put the money in the bank, waiting for a deal to come along, and your mortgage interest is not deductible. Use the money to purchase tax advantaged investments such as municipal bonds, and the mortgage interest is not deductible. Use the money for personal use, such as a vacation or buying a boat or new car, and the mortgage interest is not deductible.
Use all of the money to purchase another rental property and the mortgage interest becomes deductible against the rental income from the new property. The mortgage interest is not deducted against the original property you refinanced, but instead is an expense allocated to the newly acquired property.
Consult your tax advisor for specific details.
Thanks DaveT
Phil