Can you depreciate the money from a home equity loan on a rental property?
Posted in Renting & Real Estate on 01/18/2009 02:28 pm by admin
Celeste C asked:
If your property has appreciated in value and you elect to take out a new mortgage, thereby getting cash out, is the cash depreciable on income tax returns, even if spent on a vacation? I’ve been told that you can do this and know two people who have done it and say it’s legal. For instance, you take out a new mortgage for $80,000.00, the mortgage company pays off the old mortgage of $60,000 and you get the $20,000. as cash. You don’t have to show receipts because you simply have a mortgage which I think can be used as cost basis for depreciation. Is this true?
CRAIG
If your property has appreciated in value and you elect to take out a new mortgage, thereby getting cash out, is the cash depreciable on income tax returns, even if spent on a vacation? I’ve been told that you can do this and know two people who have done it and say it’s legal. For instance, you take out a new mortgage for $80,000.00, the mortgage company pays off the old mortgage of $60,000 and you get the $20,000. as cash. You don’t have to show receipts because you simply have a mortgage which I think can be used as cost basis for depreciation. Is this true?
CRAIG
01/19/2009 at 6:46 am
MATHEW
Your refinancing doesn’t change the “basis” of the property unless you use that money to make improvements on that property. The “basis” is based only on the purchase price and any improvements that you made on the property while you owned it.
Cost of repairs will not change the “cost basis” either. If you put a new roof on the property or install a new heater, that will change the cost basis. Generally speaking “brand new” increases the “cost basis” and repairs of existing features (like painting) doesn’t.
01/21/2009 at 5:27 am
JORGE
I’d say that’s not the case as you’ve described it. You’d have to have the rental property for depreciation purposes. What you’ve described here is nothing more than refinancing an existing loan and taking a holiday (Not a Depreciable item) with some of the extra monies refinanced. Money is not something that depreciates.
01/22/2009 at 4:46 am
THERON
I think you have depreciation and interest deduction confused.
Depreciation is calculated on the cost basis of the property (more or less what you paid for it when you bought it). Doesn’t change when you refi.
Your deduction for interest will change if you refinance. What you described is called a “cash out refinance” — where you refinance and take cash out of the property. All your mortgage interest on a rental property is tax deductible.
Have fun on vacation!