Residential Real Estate Investing in the Outer Banks
Today’s Topic – Investing with the new tax regs
The 2018 tax law limits total mortgage investment to $750,000. The tax law has lowered tax rates, changed AMT calculations and provides a variety of tax rates to potentially lower overall tax cost but it has changed the typical manner of real estate investing. Here are some ideas:
So, you’re looking to purchase a beach house which will produce sufficient income to mostly carry the investment; you’ll need to purchase a home upwards of $500,000 and likely more. With a 20% down payment, that’s at least a $400,000 mortgage and unless your permanent home has a very low mortgage balance you’ll quickly approach the $750,000 total mortgage ceiling. So, what to do to open the door to a more productive investment?
And, keep in mind, you can no longer take an interest deduction for an equity line.
So, here’s an alternative: Buy the investment property as a company (LLC or corporation) and borrow the money in the company’s name. To my knowledge there is no prohibition against a company borrowing funds in its name and including mortgage interest as an expense of the company. This type of loan is available but you’ll look long and hard to find the sources today. More on that in a moment.
Operating as a company the investment property truly becomes a business. All revenue and applicable expenses accrue to the business and the gains or losses are reported on a Federal Tax Schedule for inclusion on your tax return. What’s the advantage? You’ll be able to deduct the cost of money, mortgage interest, to the business and that benefit may well override any extra costs of borrowing, making the investment that much more attractive.
Some banks may now again offer corporate investment funds; there are also investors, operating through companies, who offer corporate funds. Loan rates for either of these types of investors will be higher than your everyday home loan. And, you’ll likely be required to personally guarantee the loan.
Real estate investing offers advantages that are not available with other investments – you can enjoy the investment for any time you spend ‘working’ on the property and you can use the property for up to fourteen days a year without affecting the deductability of the investment.
Jack and Carol are professional real estate brokers and the opinions stated in this article are theirs alone – they are not attorneys or finance professionals. The comments are borne of their lifelong experiences in the real estate industry and their twenty years of active experience on North Carolina’s Outer Banks.
Contact them for your investment search or for further discussion on investing: [email protected] or 252 202-9890.