Cash Out Refinancing
REM # F688
By Ilyce R. Glink
Summary: A reader is hoping to use the equity in their home to purchase an investment property. Ilyce discusses the best tax angle for this type of real estate deal.
Q: We currently have $214,000 balance remaining on our 15-year mortgage at
6.125 percent.
Our home is worth $800,000 to $900,000. We would like to borrow against our equity and use the cash as a down payment on a new home.
What is the most we can borrow and still have our interest payments be tax deductible? We would need more than the $100,000 in home equity to make a down payment on the investment property. Is a cash-out refinance the best way to go for us?
We are in a high tax bracket and would like take advantage of interest deductibility.
A: Current tax law allows you to borrow up to $1 million on a first mortgage
and up to $100,000 on a home equity loan and still deduct the interest paid.
What you may want to do is refinance your 15-year mortgage to incorporate the
new amount you want to borrow. As we went to press, 15-year mortgages were being
offered for about 5.5 percent, which is less than what you're currently paying.
The "jumbo loan" threshhold has risen to $417,000. So you could borrow
an additional $203,000 and still not exceed the $417,000 for a conventional
loan. I’ll assume for the moment that you can afford the payments on a
$417,000 loan.
When it comes to tax deductibility, you need to be aware that your ability to
deduct mortgage interest starts to phase out when your adjusted gross income
hits around $275,000. And, there is always the persistent Alternative Minimum
Tax (AMT) threat as well.
But when it comes to investment real estate, the real bonus is being able to
write off your expenses against income that the property generates. Please talk
to your accountant about the various deductions that are permitted.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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