Pay cash or 20% down on a loan for tax purposes; 90kMFU

[Diana Fernandez]

Hi newbie here,

This will be our first out of state Multi Family unit purchase. It’s located in Texas off market and going for 90k. I was considering paying it cash or 20% down and carrying a mortgage for tax purposes. What would you recommend? Thanks in advance

[Michael Plaks]

@Diana Fernandez

For tax purposes it does not matter. You will have the exact same deductions either way.

Well, there will be one difference, merely as a side effect: with a loan, you will pay interest, so you will have a deduction for loan interest.

What you really should be asking is whether you want to invest using leverage. It involves a lot of factors, none of them related to taxes:

• do you need to keep $70k cash, either for some other purpose or as cash reserves?
• what are the financing terms on the $70k that you can borrow?
• can you invest the $70k with a better return than it would cost you to borrow it?
• how comfortable are you with debt in general?
• what other things are going on in your life, including family, job, finances and investments?

I suggest you look at the whole thing differently from how you're seeing it now. There is a $90k property, and you have $90k, and you're buying it, one way or the other. Now you have a property, free and clear, and you can borrow $70k against that property. Will you take this opportunity to borrow money? 

I.e. back to my questions above, but with a clearer view, not cluttered by the property. This is not about THIS property really, This is about using this property to borrow another $70k.