Author Topic: Cash out refi for my commercial property - interest deduction implications?  (Read 202 times)

Shockers

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I am planning on doing a cash out refi on my self storage facility later this fall. I will probably refi approximately 1.25 million from the property.  The big question I have is will I still be able to write off all of the interest and does it matter how I use the money?   I owe approximately $250,000 on my home, additionally I have about $160,000 owed on my HELOC.  I also owe about $290,000 on a commercial multi family apartment.

I would like to use about $250,000 for improvements on the self storage facility and with the new HELOC rules I should probably pay down at least $60,000 if not more.   What happens if I use the remainder of the funds and put it in the stock market (VTSAX).  Will I have any tax implications of not being able to deduct the interest for my storage facility anymore?

SeattleCPA

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You will need to trace the interest to either personal spending, investments or the property... and that tracing will determine the character (nondeductible personal, qualified mortgage indebtedness interest, investment interest, interest on production of income activity, etc).

E.g., the $250K you trace to the improvements? That'll be more rental property interest and so potentially deductible on Schedule E.

The $60K or whatever you trace to the HELOC? That'll be nondeductible interest, possibly, if you used the HELOC funds for personal spending. (Or did you use HELOC funds to buy home or income property?)

The remaining funds you use to invest in stock market? That interest will be investment interest expense and potentially deductible.

BTW, you should probably consider having a local tax accountant check your accounting given the dollars involved.

P.S. Whether the HELOC interest is deductible or not depends. I've got a long explanation of the mortgage interest deduction rules for 2018 here:

New Mortgage interest deduction rules
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

CareCPA

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All good info by SeattleCPA.

One additional, obscure point. There are certain rules around debt-financed distributions. So if your property is held in a business, and the proceeds are used to fund a distribution to yourself, there are limitations on how much you can deduct.
If you're doing the tracing, then you probably aren't going to run afoul of these rules, but just an additional point.
Always happy to help with tax or accounting questions - feel free to private message me or check out CareCPA.com

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

SeattleCPA

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All good info by SeattleCPA.

One additional, obscure point. There are certain rules around debt-financed distributions. So if your property is held in a business, and the proceeds are used to fund a distribution to yourself, there are limitations on how much you can deduct.
If you're doing the tracing, then you probably aren't going to run afoul of these rules, but just an additional point.

+1
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

Shockers

  • 5 O'Clock Shadow
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  • Posts: 26
  • Age: 44
  • Location: PNW
You will need to trace the interest to either personal spending, investments or the property... and that tracing will determine the character (nondeductible personal, qualified mortgage indebtedness interest, investment interest, interest on production of income activity, etc).

E.g., the $250K you trace to the improvements? That'll be more rental property interest and so potentially deductible on Schedule E.

The $60K or whatever you trace to the HELOC? That'll be nondeductible interest, possibly, if you used the HELOC funds for personal spending. (Or did you use HELOC funds to buy home or income property?)

The remaining funds you use to invest in stock market? That interest will be investment interest expense and potentially deductible.

BTW, you should probably consider having a local tax accountant check your accounting given the dollars involved.

P.S. Whether the HELOC interest is deductible or not depends. I've got a long explanation of the mortgage interest deduction rules for 2018 here:

New Mortgage interest deduction rules

I used part of the HELOC to purchase the apartments and the rest to assist in buying self storage.  All of the money from the HELOC went towards these two investments.  In this scenario it sounds as though I will be able to write off all of the interest.  SeattleCPA on a side note do you personally own businesses or rentals?