This has been on my mind since it is April…
For next tax year 2018 we know the changes in tax law that cap the SALT tax deduction to only 10K … and therefore force many in high tax states like CA to take the standard tax deduction.
Therefore itemizing deductions, including primary home mortgage interest, would be pointless.
So … I am thinking - pay off the home loan. Take out loans in the same amount on the rental props —since that interest is still deductible from rental income.
Then hope that the CA legislature passes the bill to reduce state income tax liability dollar for dollar if some dollar amount is “donated” to CA coffers —- since donations for 2018 are still deductible.
Yes - but if SALT deduction is capped, then it may be that your best bet at maximizing your deductions is to take the standard deduction instead of itemizing. And if you are not itemizing your deductions, that then begs the (rhetorical) question - why carry a home loan if the interst cannot be deducted?
Yea that makes sense, but a lot of people in the bay area have 750k-1M mortgages especially new buyers. I’m thinking that’s still significantly more than standard deductions, but if you have rental properties that are paid off that you can cash out refinance, I guess that’s a different consideration.
Ah ok gotcha. Roughly caclculated, I figure that the combined interest payments on a 1M loan at 4 pc over 30 yrs sums up to be about 24K in year 15. Or, for a 15 yr loan, the combined interest payment w the same loan size sums up to be about 24K in year 7.
Since 24K is the standard deduction for MFJ, about halfway through the loan is when one would try and figure if they have enough deductions to continue to itemize the primary home loan interest… and if not (bc of elimination of SALT deductions past 10K), then “convert” that primary home loan to a “rental biz” loan so as to keep the interest deductible.
Now, I am facing a choice of either cash out refinance my primary to pay off a rental mortgage, or to cash out refinance my rental to pay off my primary (because both of them ARM are expiring)
I figure the “none deductible gap” is at most 14k (a little bit less as I have charitable donations) if I choose refinancing my primary while it is much easier to refinance and interest rate will be lower and after all, the rental income pass through in a lower tax rate while my income is directly deducted if interest is on my primary…
I am leaning toward refinancing my primary and itemize instead, am I missing something important?
SALT deduction isn’t eliminated. It’s capped at $10k, so you’d only need $14k of interest to make it worth itemizing. That’s assuming you don’t have anything else to itemize (unlikely).
Thanks. Let’s say one hits that 10K SALT deduction cap easily while itemizing. But then if one “only” needs 14K of interest and then piles on more deductions in the itemization process ----- isn’t it then easy to be chagrined (yet again) to get hit by AMT sixteen ways until Sunday?
I guess it depends on the amount of equity one has in rental properties and/or how much the rental properties are cash flowing positive ---- just thinking out loud ---- in my situation I feel like the best thing to do is to bring down AGI on line 37 to reduce the effects of AMT because that’s not calculated until line 45.
Itemizing home mortgage interest is rolled up into line 40, and since line 40 is after line 37, this has the “near fruitless” result of being subject to AMT. But, by “converting” primary home loans to Rental-RE-loans, I can bring down AGI on line 37 before AMT calculations start to negate the effects of itemized deductions on line 45…
Standard deduction is $24k for a married couple, so a married couple would need more than $24k in deductions to justify itemizing. I’m sure almost everyone here would max the $10k SALT. That means $14k of interest is the point where it makes sense to itemize over taking the $24k standard deduction. Single people like @harriet bet screwed.
@aalj I thought AMT limits were changed and AMT was mostly eliminated? I didn’t pay too close of attention to that part.
You need to load mortgage on rental home (even higher rate) and get rid of primary home loan (pay off) so that you maximize your tax deduction benefits.
@aalj - The issue I see with loading a rental is that if it puts you into a paper loss with depreciation, you can’t deduct that off your income if you are over certain income levels. You have to continue to carryover these losses until you sell a property and offset gains with those losses. I guess that’s better than losing that deduction entirely.
Got it thanks. Loading my rentals will not put me into a paper loss but thats a good point, appreciated.
Ultimately my goal is to hang onto the rentals until I die, therefore using depreciation to allow me to enjoy the income from the rentals nearly Fed and CA tax free. I then pass on the properties to my heirs, and their basis cost would get stepped up, thereby avoiding any depreciation recapture tax.
I wish, but unfortunately I am not at that level. Maybe Elt1 is.
