All Forum Posts by: Michael Masters

Many factors go into a decision like this for me. If you have multiple loans and plan on paying extra towards mortgages, I would keep HELOC and try to pay it off quickly rather than paying fees and a higher interest rate to switch. I like HELOCs because you can pay extra but then draw that money back out as needed. If you do decide to keep the HELOC make sure you deduct it as a business expense in 2017 and not an itemized deduction for your personal residence. This will be important given potential tax changes in 2018 which will perhaps eliminate your use of mortgage interest paid on your personal home. Keep some documentation that makes it clear you used HELOC for business purposes (timing if HELOC with timing if expenses paid).

Nice one Nicholas, I know a good amount about taxes but had never heard of this 72t rule. Looking to retire soon and this will help me access funds quicker!

Thanks Hadar, I thought that would be the case.

I got a Freddie Mac loan for my commercial property and in the approval process they mentioned they don’t really like distant out-of-state purchases for first deal. I gave them assurances that the property was close enough that we would be making frequent trips. In my case we bought in Boston and we live near NYC, a driving distance which is not too painful. We also have ties to Boston so I mentioned that we were traveling there frequently even without this property. Not sure if they’ll raise this with you but be ready with a good response.

Hadar, I’m curious how this worked out for you. I would have thought overseas accounts would count towards net worth, did they tell you otherwise? I got a Freddie Mac loan over the summer and in my net worth I included a sizable UK pension (I just provided latest statement). It wasn’t needed as I would have passed the net worth calc without it but this may come up as an issue in a future deal. Even if your NZ assets aren’t easily valued I would have included best estimate with some backup, worth a shot. Thanks in advance for any info!

Originally posted by @Jesse Scroggins:

Will as many "blue staters" still be needing to itemize property/state/local tax with the standard deduction being doubled ?

The standard deduction being doubled will undoubtedly be a win for mid to lower income families.

It's more confusing than that unfortunately.

While the standard deduction is being increased, the exemptions are being eliminated.  Under the old system a family of 4 would have gotten the following:

Standard Deduction + 4 * Exemptions = $13,000 + 4 * $4,150 = $29,600  (note that I used 2018 estimated values not 2017)

Under the new system they get just $24,400,  about $5K less. 

This is offset by tax rate reductions and the increased child tax credit.  Overall the mid to lower income families will be better off but hard to say exactly by how much.

Not sure if anything eventually passes, but if they eliminate/limit most deductions they should just go ahead and eliminate all itemized deductions. I noticed the only deduction really left untouched is the charitable deduction which is what the ultra-wealthy use as a total scam.  Fake charities created and over-inflated values assigned to property donated to real charities.  Look up "Donald J. Trump State Park" in Wikipedia and you'll see how something purchased for $2m in the 90's was estimated to be worth $100m just a decade later when given to NY State in 2006.  Please don't take that as a political statement if you support Trump, just an example of why I don't like picking and choosing what deductions stay or go, just scrap it all!

This may not pass as is, an opening gambit for negotiation. Hurts Blue states the most, but be aware that there are many Republicans from these states (for example, northern NY has very different politics than NYC), so not all Republicans in the House/Senate will fall in line and vote for it. I’m no CPA but overall I would say this helps REI, most of the benefits are named above by others. I’ve actually downloaded the massive document and started reading through it in detail. Your heirs would also benefit if you have a sizable portfolio when you finally kick the bucket. This will hurt me outside of my investment real estate side. People who live in high tax states should consider accelerating itemized deductions. I will be accelerating itemized deductions where possible (paying 2017-18 real estate taxes on my personal residence in a lump sum in December rather than in installments into next year, and also making sure my state income taxes for 2017 are paid in full by December with none due when I file next year). This is just me though, you’ll need to check out your own situation. Again, I’m no CPA and this may not pass as is.

I've seen a lot of debate on whether or not there is protection of personal assets from forming an LLC, I'll let someone else kick that discussion off.

Personally, I did not form an LLC with the multifamily I bought this year but I wish I had. The reason being that the Trump/Republican tax plan will may lower the tax rate on LLCs from your top personal rate to the lower rate they will use on corporations. The latest I've heard any drop in the current corporate rate will possibly be phased in over multiple years. The advantage of this depends on your current/future top tax rate.

However, nothing is certain for now. Tomorrow at 9am they are supposed to provide their tax plan, I'll let you know what they say then. This will have a big impact on my own decision on LLC as I'm currently in the top tax rate. As you can guess with politics today though, who knows what will ultimately happen.

As far as your HELOC vs mortgage question, I use a hybrid approach. My house is half on a standard fixed rate mortgage and half available on HELOC. This let’s me cheaply and quickly access additional funds which can be paid off quickly without penalties.

Josh, mortgages charge you interest based on the outstanding balance owed each year. Because you owe most the day you take out a loan that’s when you pay the most interest. Here’s a simplified example: Loan taken out for $100,000 at 10% interest: Annual payment made of $25,000 Year 1 interest = 10% * 100,000 = $10,000 Principle paid = $25,000 - $10,000 = $15,000 Principle due at end of year 1 = $100,000-$15,000 = $85,000 Year 2 interest = 10% * $85,000 = $8,500 Principle paid = $25,000 - $8,500 = $16,500 Principle due at end of year 2 = $85,000 - $16,500 = $68,500 Year 3 interest = 10% * $68,500 = $6,850 Principle paid = $25,000 - $6,850 = $18,150 Principle due at end of year 3 = $68,500 - $18,150 = $50,350 Year 4 interest = 10% * 50,350 = $5,035 As you can see, as the loan progresses through time you owe less principle and so you are charged less interest. By year 4 interest is half of year 1 because you owe half of what you owed in year 1. Banks are charging you the same rate (10%) but you have the advantage of having paid off a good chunk. As far as fees charged up front for inspections etc, everyone needs to make a salary for work provided.