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Guru_Guy
Guru_Guy, Lawyer (JD)
Category: Tax
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Experience:  I am a lawyer who understands tax law and finance.
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If I pay off mortgages totaling $290000 on 2 ...

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If I pay off mortgages totaling $290000 on 2 investment properties with proceeds from a home equity line of credit on my primary residence, will the interest I pay on the home equity loan be tax deductible?
Submitted: 8 years ago.
Category: Tax
Expert:  Guru_Guy replied 8 years ago.
Hello,

Under the scenario you describe, the loans would only be partially deductible.

First, you can only deduct up to the value of your home. So if, for example, the loans on your home total $300,000 and your home is only worth $280,000, that last $20,000 would not be deductible. For the rest of my answer, I will assume that the home equity line of credit, combined with all other mortgages tied to your primary residence, does not exceed the property's value.

An existing home owner who already has a mortgage, can take out additional mortgages for home improvement or repair. But if they take out a loan or line of credit for other purposes, such as financing other properties as in your case, then only the first $100,000 of additional borrowing would qualify as being tax deductible.

Since interest on debt on investment properties is already deductible as a business expense, borrowing more than $100,000 would not make much sense from a tax perspective.

I hope this answers your question.
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IRS CIRCULAR 230 NOTICE: Absent an engagement for written tax advice prepared in compliance with the regulations promulgated by the U.S. Department of Treasury, no person prepared the written information contained in or accompanying this communication for use or reliance, and no taxpayer can, therefore, use or rely upon the written information contained in or accompanying this communication, (i) to avoid any penalties that the IRS may impose, or (ii) for the purpose of promoting, marketing, or recommending to another party any tax-related matters.
Customer: replied 8 years ago.
Reply to Guru_Guy's Post: If I pay off a $163000 mortgage @ 6.625% with fully tax deductible interest of $10799 (this year) with a $163000 home equity loan @ 4.6% with tax deductible interest of $4600 (constant for several years) I calculate my savings would be about $146 per month for the first year (not including reduced minimum payments which could accelerate principal reduction). Is that correct (25% tax bracket)?
Expert:  Guru_Guy replied 8 years ago.
A $163,000 mortgage, paying $900 per month, would result in $10,799 interest for the first years. If you are in the 25% tax rate and can fully deduct this amount, your after tax expenses would be $8099.

If you get the $163,000 home equity at 4.6%, that will cost you $7427 in interest for the first year. Since you can only deduct interest on the first $100,000, your cost after the tax benefit would be $6080.

So your savings would be just over $2000 per year with the line of credit option.

Notice that because of the lower interest rate, even if the line of credit was not deductible at all, you would still save a little money.

So given the much better interest rate, it does make sense in your case to go with the home equity line of credit.


___________________

IRS CIRCULAR 230 NOTICE: Absent an engagement for written tax advice prepared in compliance with the regulations promulgated by the U.S. Department of Treasury, no person prepared the written information contained in or accompanying this communication for use or reliance, and no taxpayer can, therefore, use or rely upon the written information contained in or accompanying this communication, (i) to avoid any penalties that the IRS may impose, or (ii) for the purpose of promoting, marketing, or recommending to another party any tax-related matters.
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