Primary Residence: Remaining Principal: $100k
Purchasing an Investment Property that requires Non-Warrantable Loan: Loan Amount $240k
Primary Residence Appraisal Value: $500k
Option 1: Cash out refinance on primary residence and use excess cash to purchase investment property condominium
Option 2: Take out a new mortgage (non-warrantable loan) for the investment property
The interest rate of a cash out refinance is lower than if I were to take a new mortgage for the investment property, but am I missing out on any tax write-offs by adding the investment loan to my current primary residence loan? Am I still able to write off all loan origination/closing costs, etc.? What option should I do? What am I giving up, if anything?
for the interest to be fully deductible, the most you could cash out is the mortgage balance on your residence and the cost to purchase investment property. any excess would be treated as a home equity debt and due to tax law changes effective in 2018, interest is not deductible. points paid need to be allocated between the two properties and need to be amortized over the life of the mortgage/refi. other costs of refinancing also need to be allocated. those allocated to the residence do not add to basis (see IRS pub 523) and therefore are lost.
regarding the portion of a refi allocated to your home, it becomes a personal decision as to whether the money saved is worth the up front costs.
I'm still not clear what I'm losing on tax write-offs if I get the funds via a cash out refi or a new loan. Can you advise?
I only plan to take the dollar value on the cash out refi that is required to purchase the investment property. I want to know if taking out a new loan or doing a cash out refi has better tax advantages? I know that the interest rate is better on a cash out refi so I want to understand specifically what deductions I am giving up by doing a cash out refi against my primary residence in order to purchase an investment property.
I do not agree with the initial response........ from pub 936
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. As under prior law, the loan must be
secured by the taxpayer’s main home or second home (qualified residence), not exceed the
cost of the home, and meet other requirements"
As this is an investment property which is not a qualified residence, NONE of the interest from the cashout mortgage on the primary home would be tax deductible. ALL the interest (subject to passive income rules) would be tax deductible if a new mortgage is secured by the investment property.