I need some Tax Advice for rental property. My primary residence is in Va. I paid off my home last month and it is valued at about 250k. I also own a rental and it is valued at about 140k. I currently owe 4500 on it and it will be paid off next August. I am thinking about buying a second rental for 170k. I am not sure the best option for financing it. My credit is excellent. Here are my options: Option A: I can finance 80% of the 2nd rental (135k) @ 6.3%. I can then do a cash-out refinance of my first rental property for 35k at 6.3%. The positive side of this is that come tax time, I can take the standard deduction since I own my primary residence free and clear. I can also deduct all my mortgage interest paid on my "Schedule E" thus I am writing off interest against my rents received. Another positive is that my home has nothing against it thus it is somewhat safe in case of a major catastrophe. The negative side of this is that I would be doing two closings since I am using two properties to come up with the 170k and the interest rate is 1/2 point higher since it is investment property. Option B is for me to take out a mortgage for 170k from my primary residence. The positive side of this is that I can get the loan at 5.8% instead of 6.3 because it is my primary residence and not an investment residence. I would then own two rental properties free and clear. The negative side would be that there are no interest that can be deducted from the rents received on the "Schedule E" I would have to itemize and I could only write of the interest against my primary residence, thus the Standard Deduction would no longer be available to me. Another con is that I now owe money against my primary residence and in case of a catastrophe, I could loose my home. My yearly income from wages would be about 50k not counting rental income My first rental would rent for about 800 per month My second rental would rent for about 1200 per month. Please provide any additional insight that I may be missing. Also, please advise any tax issues if known and recommend weather you think I should go with Option A or Option B. Thanks Pat
- posted
16 years ago