Quote from @Isaac S.:
TAXES...
Loans are non taxable large cash infusion events, AND their interest payments are fully deductible.
IMHO, the strategy for commercial lending is either have a disposition strategy(exit) that is based on the loan term OR at the end of the term refinance/cashout any of the equity you have accumulated(assuming appreciation) and reinvest it in other properties, in order to diversify the built up equity from the original investment with the intention of growing a portfolio, OR have the equity cash out to buy expensive things with(stocks, yacht, beach house, RR, Gulfstream jet, etc) and let the investment property cover the debt service on that thing purchased with the cashout, depending on the greater economic conditions. Of course, more income producing RE would be my first choice and probably most on this site.
...... all of that can go seriously sideways if you have to large LTV, and your loans mature from very low interest rate to much higher and go from black ink to red accordingly because rents didn't keep pace with the difference in new higher interest loan payment.
The point is.... that if you have a completely paid off, fully depreciated asset, you don't have tax depreciation expense incentives, but if you redeploy the equity from the refinance loan into another asset, you have a larger fully deductible loan payment, untaxed inflow of cash from the refinance, and new asset with a new depreciation schedule that shelters some amount of the equity in your RE portfolio, instead of no depreciation on the initial paid off primary asset.
When done correctly you minimize tax liability, maximize diversification, maximize appreciation, maximize portfolio growth and maintain a stable cash flow with occasional large infusions.
Unless, I am missing something?
Thank you explaining the approach in this much detail. It makes a ton of sense. One question- when you say the new depreciation schedule that shelters some amount of equity in your current RE portfolio, don’t you mean shelters some of the income?
As I understand it, the depreciation helps with additional deductions from your RE income.
If not, please clarify what you meant by sheltering equity.
Thanks!
