@prash wrote:
@Opus 17 Thanks for the replies.
Yes, i agree that buying with cash and replenishing later does not do me good overall, unless i keep tons of records ready.
What i am currently planning to do is: Regular Finance as acquisiton loan for investment property. However, the downpayment of this investment property, will come from my cashout refinance funds(secured on primary home).
The thing which is bothering me is :-
Cashout refinance has lets say $100 funds available to me, for using it.
1.)$10 - Used for downpayment on investment property
2.)$10 - Used for stocks investments
3.)$10 - Used for stocks . Then sold it, then putting it back to realestate investment downpayment
4.)$70 - Waiting for next oppurtunites to arise. It may take me 6-12 months for same.
Are all above 4 items eligible for deduction, as long as i can show the intent. If there is a waiting period, i may use funds to move around for other investment types and then put it back, as and when needed.
For such scenarios, how does deduction work?
You are now talking about refinancing your primary residence with a cash-out mortgage, and using part of the money for investment purposes?
The first rule of course, will be that any debt that is not acquisition debt on the residence, is not deductible mortgage interest on schedule A.
You want to use some of the cash-out monies for other investments, including the down payment on a property, stocks, and "the next opportunity." This is extremely risky. You would again have to meet the tracing rules. Let's suppose you refinance your home for $100,000 on a 4% 30 year mortgage, and your current acquisition debt is $80,000, with $20,000 cash out. This is what your first few months will look like.
| Payment Date |
Payment |
Principal |
Interest |
Total Interest |
Balance |
Jul-21
|
$477.42
|
$144.08
|
$333.33
|
$333.33
|
$99,855.92
|
Aug-21
|
$477.42
|
$144.56
|
$332.85
|
$666.19
|
$99,711.36
|
Sep-21
|
$477.42
|
$145.04
|
$332.37
|
$998.56
|
$99,566.31
|
Oct-21
|
$477.42
|
$145.53
|
$331.89
|
$1,330.45
|
$99,420.78
|
Nov-21
|
$477.42
|
$146.01
|
$331.40
|
$1,661.85
|
$99,274.77
|
Dec-21
|
$477.42
|
$146.50
|
$330.92
|
$1,992.76
|
$99,128.27
|
For purposes of the schedule A deduction, you are allowed to consider you pay off equity debt first. So on your 2021 tax return, you would start the loan at 80% deductible interest, and end the 2021 year with 80.7% deductible interest (80000/99128), so overall you could deduct the average, or 80.35 of the interest. By the end of 2022, your balance is down to $97,331, so your deductible acquisition debt interest ($80,000 of acquisition debt) is up to 82.2% of the total interest. And so on.
Into that mix, you want to take some of the $20,000 cash out, and invest it in a property, and some more of the $20,000 and invest it in stocks, then pull it out of stocks, and hold onto it until you find another opportunity.
How, exactly, are you go to prove with all those moving pieces, that a particular $1 of mortgage interest is allocable to the downpayment on the investment property and another particular $1 is allocable to the stocks you bought? And I don't see any way for you to allocate interest on the cash out portion to a fund you are holding for other opportunities.
I think you have pushed the concept of investment interest being allocable to the different investments past the breaking point, and I don't think it is any way reasonable to try and do this. You might have a case if you bought and held one single identifiable investment that you could easily allocate the interest between acquisition debt and investment interest, but I am starting to find this getting very dodgy.
