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Vacation Rental Mortgage vs Primary Refi
Old 01-19-2021, 05:30 PM   #1
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Vacation Rental Mortgage vs Primary Refi

I'm pulling a quote from another thread to start this one (hope that's allowed):

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Originally Posted by pb4uski View Post
Not necessarily. The rent, mortgage interest, property taxes and depreciation of the two rent houses will be reported together on Schedule E, Rental Income.

For itemizing deductions, you'll include mortgage interest and property taxes on your personal residence... so you may be better off using the standard deduction (most people are).
The above being the case, it would seem to make much more sense to get a mortgage on a rental instead of refi-ing your primary and buying the rental with cash, is that right?
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Old 01-19-2021, 05:36 PM   #2
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If I was going to buy a rental, I'd borrow the down payment and mortgage the rental, so the entire purchase price interest is deductible.

So I'd find out what % I could mortgage the rental (often less than a personal house) and then refi my home to suck out cash to use as the down payment, or borrow the cash from a brokerage (have heard this can be done).
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Old 01-19-2021, 05:52 PM   #3
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I think you lost me here:

"so the entire purchase price interest is deductible"

Does this assume you itemize the interest on your primary residence? Pretty sure I'd be taking the standard deduction.
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Old 01-19-2021, 08:51 PM   #4
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Means interest on down-payment presumably cashed out from primary home would also qualify as a business expense.
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Old 01-19-2021, 11:07 PM   #5
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Originally Posted by cat4ever View Post
I think you lost me here:

"so the entire purchase price interest is deductible"

Does this assume you itemize the interest on your primary residence? Pretty sure I'd be taking the standard deduction.
The rental is treated separately from the primary residence and work/etc income.

Expenses for the rental like real estate taxes and water, and interest paid on the money to buy the rental are deducted against the rental income.
It's not mixed with what you do on your return without a rental.

Whether you are allowed to deduct losses on the rental depends upon active participation in the rental and non-rental income amounts. Earn too much and your losses get carried over.

Getting into a rental without spending a lot of time learning about it, can lead to some expensive mistakes.
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Old 01-20-2021, 08:45 AM   #6
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Interesting. As far as timing, can you do the refi before you buy the vacation rental house and set that money aside until it's time to pay the down payment? If so, will all interest paid on on the refi be deductible, or only the interest paid after closing on the vacation rental?
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Old 01-20-2021, 11:32 AM   #7
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Interesting. As far as timing, can you do the refi before you buy the vacation rental house and set that money aside until it's time to pay the down payment? If so, will all interest paid on on the refi be deductible, or only the interest paid after closing on the vacation rental?
The safe choice would be after the purchase, the interest is deductible.

If you like discussing things with the IRS, and its only a month or two of interest, one could argue all the refi interest.
But what happens if you don't find the vacation home, or it's 6 months later or a year later, at some point, the argument fails.
Especially if you cross a calendar year boundary, and try to deduct interest for a rental you don't own.
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Old 01-20-2021, 11:58 AM   #8
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The safe choice would be after the purchase, the interest is deductible.

If you like discussing things with the IRS, and its only a month or two of interest, one could argue all the refi interest.
But what happens if you don't find the vacation home, or it's 6 months later or a year later, at some point, the argument fails.
Especially if you cross a calendar year boundary, and try to deduct interest for a rental you don't own.
I'm OK with losing a few months of deductibility, but am a little afraid of applying for two fairly large mortgages at the same time, which basically comes down to mortgaging the entire cost of the vocational rental while avoiding the extra mortgage insurance that would otherwise be required.
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Old 01-20-2021, 12:08 PM   #9
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I do have to wonder about the choice of wanting to get a vacation rental.
It's a lot of work, maybe there is another thread where you have posted and gone though the details
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Old 01-20-2021, 12:35 PM   #10
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I do have to wonder about the choice of wanting to get a vacation rental.
It's a lot of work, maybe there is another thread where you have posted and gone though the details
+1. Vacation rental is a full time job. This is the only reason I do long term lease because I don't want to work when I retire.
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Old 01-20-2021, 04:58 PM   #11
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I've read quite a few of the threads on the topic and while there are certainly a lot of folks who tried it and greatly disliked it, there are others who have been very pleased with the results. I also have a brother that has 3 vacation rentals spread across the southwest who continually praises it as easy passive income with great ROI. And he's a 0.1%'er so he doesn't need the money. He says he and his wife enjoy shopping around for things for his rentals and doing maintenance and it's all tax deductible, and says they only occasionally have to answer a call or text from a renter.
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Old 01-20-2021, 06:19 PM   #12
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In that case, stick with the area you know works and keep your fingers crossed.
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Old 01-20-2021, 10:57 PM   #13
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I've read quite a few of the threads on the topic and while there are certainly a lot of folks who tried it and greatly disliked it, there are others who have been very pleased with the results. I also have a brother that has 3 vacation rentals spread across the southwest who continually praises it as easy passive income with great ROI. And he's a 0.1%'er so he doesn't need the money. He says he and his wife enjoy shopping around for things for his rentals and doing maintenance and it's all tax deductible, and says they only occasionally have to answer a call or text from a renter.
Well either it's a hobby for him, or he knows some really great Methods of Operation (Moo) , and is milking those cows for all they are worth.

Personally, I've never enjoyed shopping for roof, furnace, A/C, windows, plumbers, bathroom fans, etc...

So ask him details and let us know, as I'm always willing to learn new stuff.
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Old 01-21-2021, 03:28 PM   #14
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yeah, definitely a hobby for him. He makes decent money I'm sure, but peanuts for him. I'd have the same outlook. Just hoping to break even, or even lose just a little and see it more as a diversification of my savings and also is something I could see us using 3-4 months out of the year at some point as a true vacation home.

Here was one of his notes on his vacation rentals:

"It rolls in weekend after weekend unlike a job that you have to go to and actually work. It's almost like having a robot that does all the work for you. Lisa has the occasionally smooze with a customer over the phone but it's pretty rare. Everything else is pretty well automated right down to the canned responses needed for door codes and Wi-Fi. "
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