Minimizing Taxes using Equity in Rental Property

[John Wolf]

I am retired with a several rentals and looking to minimize taxes. I was reading a tax saving idea regarding using the equity in a real estate rental instead of withdrawing Retirement Savings. From what I understood, I can refi the paid off rental, do a cash out, and use money that to live on. Since that money is not income, it would not be taxed. That would allow me to not withdraw the money from my IRA, thus saving tax on those withdrawals and letting that money grow. I estimate the refi money will last me 5 years, then I'll sell the property, as I was planning to sell at that time anyway. According to my calculations, the tax savings was well worth the effort and made up for the additional expenses. Am I missing something?

[Eamonn McElroy]

It's a valid strategy.  The interest on the cash out refi will likely not be deductible as you're using the proceeds for personal expenses.

"Am I missing something?"

Real estate doesn't always appreciate (e.g. 2004 through 2009).  What if you can't sell in 5 years because you're underwater?  Not trying to scare you, all angles need to be considered.

If it's a traditional IRA, you're going to have to start taking RMDs eventually...also your rental real estate depreciation probably gets that net taxable income close to zero? It might make sense to withdrawl a little bit from the IRA each year -- or do a Roth conversion for a small amount each year depending on your age.

All good questions for your CPA and financial planner.  Don't let the tax tail wag the dog.