Author Topic: Refi funds to pay for mortgage  (Read 698 times)

rae09

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Refi funds to pay for mortgage
« on: January 04, 2024, 12:45:51 PM »
I was talking to a friend of mine and now I'm curious to learn more about this. So he took a cash out refi on his rental properties before the rate went up. He didn't use the money for anything. Due to his spouse's medical issue, he had to leave his job to take care of her. To keep cash reserve for medical and living expenses, he used the money from the refi to cover all the rental expenses and also the rental mortgage payments. Would the interest on those refi funds used for the expenses & mortgage be eligible for tax deduction?

It kinda sounds like double dipping since the original mortgage interest (home acquisition debt) is already deductible, but if he takes a loan to cover the original mortgage payment and expenses on the rental, wouldn't the loan interest be eligible for deduction? If so, then the interest of the refi funds used for the rental expenses would be deductible as well, correct? I feel like I'm missing something here.

Chris Pascale

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Re: Refi funds to pay for mortgage
« Reply #1 on: January 05, 2024, 11:47:37 PM »
Loan interest is eligible, but if this is just a part of his personal return it may not take him over the standard deduction.

If they have high enough medical bills, they'll be itemizing anyway. If not, then at 3% you'd need about $925k in loans to exceed the 2023 amount of $27,700.

clarkfan1979

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Re: Refi funds to pay for mortgage
« Reply #2 on: January 06, 2024, 04:57:54 AM »
I was talking to a friend of mine and now I'm curious to learn more about this. So he took a cash out refi on his rental properties before the rate went up. He didn't use the money for anything. Due to his spouse's medical issue, he had to leave his job to take care of her. To keep cash reserve for medical and living expenses, he used the money from the refi to cover all the rental expenses and also the rental mortgage payments. Would the interest on those refi funds used for the expenses & mortgage be eligible for tax deduction?

It kinda sounds like double dipping since the original mortgage interest (home acquisition debt) is already deductible, but if he takes a loan to cover the original mortgage payment and expenses on the rental, wouldn't the loan interest be eligible for deduction? If so, then the interest of the refi funds used for the rental expenses would be deductible as well, correct? I feel like I'm missing something here.

I've done two cash-out re'fi's on rental properties. Both times, I used the money to buy more property. I borrowed against one asset to buy another asset. It's awesome.

I bought a single family rental in 2007 for 182K and 10K of repairs with an original mortgage of $145,600 at 6%, so my Principle & Interest was $873. I did a regular refinance in 2009 that lowered the rate to 4.75% and the PI to $760. In 2017, I did a cash-out re-fi and got a new loan balance of $262,500 with an interest rate of 4.625%. I got a cash-out re-fi check for $146K + 1 month of not making a mortgage payment. My new PI was $1350. Because my PI went up by $590, my cash flow on the rental went down by $590. Because I have less cash flow, I pay less tax going forward. I got access to the 148K with paying no capital gains.

I used the 148K to buy another property. It was originally a primary residence in 2018, but became a rental in late 2019. It originally cash flowed about $1,000/month, but now it cash flows $2700/month (not including vacancy or repairs). The loan has been paid down by about 50K and we have also had about 500K worth of appreciation. 

In October 2019, I did a cash-out re-fi on a different rental to buy my current primary house in November 2019. I got a check for 107K + 1 month of no payment. This one might be more controversial because my original mortgage rate was 4% and I refinanced into 4.875%. However, the new house appreciated from 280K to 400K and my current mortgage rate is 2.875%. I think the cash-out re-fi was worth it, even though I re-financed into a higher rate.

I used 60K for the house and 5K for furniture. We used the rest (42K) to fund our Roth IRA's over the next 4 years.

From 2019 to mid 2023 we were basically cash-flow neutral. However, we were able to fund our Roth IRA during that time with the extra money from the cash-out re-fi hanging around. Now in 2024, we will be able to fully fund our Roth IRA's with our W2 wages and rental cash flow.     
« Last Edit: January 06, 2024, 05:02:41 AM by clarkfan1979 »