Author Topic: Margin Loan for Second Home/AIRBNB - Tax deductible? How to document  (Read 1678 times)

Jacob F

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Dear MMM Forum Friends,

my wife and I recently purchased a second home that we also rent out through AIRBNB / VRBO. We have financed this purchase so far with a second home mortgage at 7.375%
As the FED has lowered interest rates, but the 30year mortgages remain stubbornly high (especially for second homes and refinances) - I am considering refinancing the house via a Margin Loan at Interactive Brokers (see MMM Article here: https://mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/).

We have enough in Investment Accounts at IBKR to refinance comfortably and lower our Financing costs from currently 7.375% to then 5.5% which is a considerable savings.
I am aware of the risk of increasing interest rates on the Margin Loan.
My bigger concern is: Can I take the interest costs for the margin loan off of my taxes when it comes to the Income the house generates? I unfortunately cannot find anything about this in literature / online that states that this is somehow prohibited.

Has anyone done this before? If so, what are your experiences and how do you document the whole topic and ensure its clear the margin loan is associated to the house in a way that its Tax-Proof?

Thanks in advance for the feedback and helpful discussion.

Jacob F

dandarc

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Re: Margin Loan for Second Home/AIRBNB - Tax deductible? How to document
« Reply #1 on: October 29, 2024, 08:20:02 AM »
Not a tax lawyer, and have no desire to be a landlord or hotelier, but that does look like interest expense to me in a general business sense. Keep good records, particularly for splitting out any personal use of course.

On something of this magnitude (how much are you saving in dollar terms on that 2%ish spread?), probably worth it to hire a CPA or tax attorney at least for a consultation.

ETA: The other risk is a margin call - make sure you're aware of requirements there, particularly if investment values start going down.

GilesMM

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Re: Margin Loan for Second Home/AIRBNB - Tax deductible? How to document
« Reply #2 on: October 29, 2024, 10:13:31 AM »
The interest is a business expense as the house will be claimed as a rental on your filing via Schedule E.


Jacob F

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Re: Margin Loan for Second Home/AIRBNB - Tax deductible? How to document
« Reply #3 on: October 30, 2024, 06:54:50 AM »
Thank you everyone for the reply - I agree with what you, dandarc and GilesMM mentioned. I will document intensively and likely also check with an accountant.

The saving is significant - 2% equal almost 20.000 USD per year in this case. It might be prudent to call a CPA for this, however, I have had bad experience with Tax Advisers, e.g. I have had an adviser once who told me the Backdoor Roth IRA and the Mega Backdoor Roth IRA should not be used...
If I nevertheless go that route I will circle back and post in case something arises.

With Best regards,
Jacob

dandarc

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Re: Margin Loan for Second Home/AIRBNB - Tax deductible? How to document
« Reply #4 on: October 30, 2024, 09:01:48 AM »
Accountants do tend towards being overly financially conservative, and of course there's a wide range of expertise - wouldn't let one person sour on the whole field.

SeattleCPA

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Re: Margin Loan for Second Home/AIRBNB - Tax deductible? How to document
« Reply #5 on: December 06, 2024, 07:51:43 AM »
Thank you everyone for the reply - I agree with what you, dandarc and GilesMM mentioned. I will document intensively and likely also check with an accountant.

The saving is significant - 2% equal almost 20.000 USD per year in this case. It might be prudent to call a CPA for this, however, I have had bad experience with Tax Advisers, e.g. I have had an adviser once who told me the Backdoor Roth IRA and the Mega Backdoor Roth IRA should not be used...
If I nevertheless go that route I will circle back and post in case something arises.

With Best regards,
Jacob

So I think problem to be aware of here is that a qualified mortgage's interest may be partly deductible on Schedule E and then if Section 280A applies (which is does if you're using the property personally at all), also partly deductible on Schedule A. E.g., $70K of home mortgage interest might show up as $35K interest expense on Schedule E (or C) and $35K of mortgage interest on Schedule A.

In comparison, $50K of margin interest, split the same way, maybe produces a $25K Schedule E (or C) deduction... but it'll produce no mortgage interest deduction.

This may not matter. But it'd be something to consider.

Note: This blog post may help you refine your thinking about Section 280A: https://evergreensmallbusiness.com/vacation-home-rental-tax-traps/

BTW regarding the Roth and MBDR... To defend the tax accountants here, I see dozens of tax returns every year where the taxpayer uses Roth accounts or makes Roth conversions and it's the wrong choice. Most people can't do the math required or don't want to learn the accounting. They just hear the sirens singing "no taxes at withdrawal" and assume that means its a good deal. The so-called wealth advisors often contribute to this circus by talking up the idea as if it's the best thing since sliced bread. Part of the value that justifies their 1% or whatever fee.

Note: I've been playing with JavaScript and ChatGPT and adding calculators to some of my blog posts. Here's one that lets people calculator whether they end up with more money using a traditional or a Roth account:

https://evergreensmallbusiness.com/roth-calculator/

At the bottom of the calculator's web page, some links point to more conceptual blogs that explain why Roth's usually don't deliver the optimal outcome.