Posted on: 12-11-12 16:26:05
Hi Guys,
I have question related to investment property.
Let's assume someone own Primary Home A and Investment Home B. Both homes have some mortgages.
For Example:
Primary Home A (mortgage rate): 3.5%
Investment Home B (Mortgage rate): 3%
Initial Mortgage Amount of Home B: 210K (after 20% down payment)
After 2 years remaining mortgage for Home B: $200K ($10K paid toward mortgage)
I think at the time of mortgage renewal, $10K can be used for personal expenses and mortgage amount will be again $210K for Home B.
1) If $10K used for Home B, only 3% interest will be saved. ($300)
2) If $10K used for Home A, 3.5% interest will be saved ($350) + 30% tax on $300 - interst paid on Home B ( $100) = $450.
is this right?
Do you think is it worth to do it?
Thanks,
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Success is Never Ending and Failure is Never Final.
Sincerely, you need to take "understanding Finance 101". If it was that simple, many people would have jumped in the bandwagon. What about potential appreciation in house B or potential erosion in value? What about ACTUAL savings of 10,000? Ponder before posing a question.
Hi Nightmare,
Thanks for your response.
I don't understand much financial terms.
I am aware of paying tax on capital gain at the time of when House B will be sold.
$10K saving in mortgage (House B) paid from the Rent and Rent already shown as an income in last two years and paid tax accordingly.
If you don't mind, could you please explain me what is wrong here?
Thanks,
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Success is Never Ending and Failure is Never Final.
Question related to investment Home.
Quote:
Originally posted by meitsme
Hi Guys,
I have question related to investment property.
Let's assume someone own Primary Home A and Investment Home B. Both homes have some mortgages.
For Example:
Primary Home A (mortgage rate): 3.5%
Investment Home B (Mortgage rate): 3%
Initial Mortgage Amount of Home B: 210K (after 20% down payment)
After 2 years remaining mortgage for Home B: $200K ($10K paid toward mortgage)
I think at the time of mortgage renewal, $10K can be used for personal expenses and mortgage amount will be again $210K for Home B.
1) If $10K used for Home B, only 3% interest will be saved. ($300)
2) If $10K used for Home A, 3.5% interest will be saved ($350) + 30% tax on $300 - interest paid on Home B ( $100) = $450.
is this right?
Do you think is it worth to do it?
Thanks,
.......................................................................................................................................
YOUR ASSUMPTIONS ARE..:
1) The property Value will remain the same for the Primary place and the Rental home (A and B. respectively)
2) You will be permitted to withdraw, what is in excess of the 20%, that is paid into the Mortgage. Which is 10K, according to your calculations.
YES. Your calculations based upon the assumptions made, are correct.
"Nightmare" wants you to take into consideration the current market conditions and see if the rental property has 'appreciated' in value or it has 'erosion' or the value has gone down.
Currently Real Estate markets are slowly moving down. So, in actual fact, there will be erosion that needs to be looked into prior to making such an assumption. BUT in the long run, holding onto the Rental property 'B' will determine what the financial gains will be, if it ever gets sold and at what price.
It is nice to note the factors that are into play here.
1) There is no deduction on the Mortgage amount paid for the Prime Location. ( in your Tax return) The money paid for the mortgage has two components, one is the Principal portion and the second one is the Interest. But you do recover the Principal portion back as FREE CAPITAL GAINS, if and when you sell your Principal home. The interest portion gets negated as the mortgage amount you pay is from the after tax money, from your pay.
2) the Rental Properties that are a business, and does get that Mortgage Deduction up front and you are able to use the interest portion in your calculations, either when you file the taxes or assuming that you will in your calculations, such as in your assumptions in your posting.
Then again, if you do not have a Mortgage Broker who will assist you with the adjustments you are seeking, you cannot do the juggling of the funds between the TWO mortgages as and when you please. Also there may be other factors that will enter the picture such as re-evaluation costs, legal fees etc., into it. So decide for yourself what are all the expenses that enter into the picture and put them on a piece of paper, prior to making such decisions.
FH
FullHouse, Thanks for detail.
I still have question.
Don't worry about moving fund from investment home to primary home.
On investment home, there is $10K paid on principal in last 2 years. Total rental income was shown as income and interest was claim for deduction.
At the time of mortgage renewal (after 2 years), Bank is ready to change the mortgage amount ($10K more) without any panelty or fees. Bank can also deposit this $10K in my personal checking account.
is it okay to use this $10K for my personal expense? (Can I say $10K is tax paid and I can use however I want?)
OR
I must have to use this $10K for investment purpose and keep track to report gain/loss for income tax purpose.
One more question about Capital gain/loss caluculation when selling investment home.
Let's assume buying price of home is $300K. Selling Price of Home after 5 years $330K.
Remaining mortgage amount after 5 years is $275K.
I assume capital gain will be calculaated on base of difference between selling price and buying price ($30K). Am I right? (There is no relation with remaining mortgage amount).
Thanks,
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Success is Never Ending and Failure is Never Final.
Quote:
Originally posted by meitsme
FullHouse, Thanks for detail.
I still have question.
Don't worry about moving fund from investment home to primary home.
On investment home, there is $10K paid on principal in last 2 years. Total rental income was shown as income and interest was claim for deduction.
At the time of mortgage renewal (after 2 years), Bank is ready to change the mortgage amount ($10K more) without any penalty or fees. Bank can also deposit this $10K in my personal checking account.
is it okay to use this $10K for my personal expense? (Can I say $10K is tax paid and I can use however I want?)
OR
I must have to use this $10K for investment purpose and keep track to report gain/loss for income tax purpose.
One more question about Capital gain/loss calculation when selling investment home.
Let's assume buying price of home is $300K. Selling Price of Home after 5 years $330K.
Remaining mortgage amount after 5 years is $275K.
I assume capital gain will be calculated on base of difference between selling price and buying price ($30K). Am I right? (There is no relation with remaining mortgage amount).
Thanks,
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IN ANY BUSINESS : You have income and expenses, and so also in a rental property, which you are running as a business. Your income in that property is the amount that you receive as RENT.
In the accounting process there are two columns and a bottom line. The rent goes into one and the expenses go into the other. There are expenses which you apply to this rent.(Then there are others) After your adjustments, you come to a line which will denote as the profit. That is what we call the BOTTOM LINE. It is on this, based in which bracket you pay taxes, you get taxed.
You will know all of this after you complete your tax return. After you pay the taxes and apportion (Calculate the exact amount of tax paid on this profit you made, you will find that PARTICULAR sum.) the exact amount for this rental business, you can also derive at the EXACT Profits that you made. That is what you will be permitted to take as your profits from this RENTAL BUSINESS. According to you, it is a sum of $10,000.
SURE, you can take it out of that business for your personal use and do as you please with it.
When I say do as you please, it can be for ANYTHING that PLEASES you.
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If I have a choice, which I do, I will not co-mingle my TWO accounts, for one simple reason. I will let the business run separately and and I run my salary account separately. At the end of the day, (YEAR) I will know what I have left and in which account. So I don't mix my 'P's and 'Q's.
I get credit for all of the expenses incurred, PLUS also for the 'interest portion' of the mortgage payment in my accounting. It will also tell me how much has been paid into the mortgage. (Which you say is 10K)
Now if this figure is 10K as you state, then, it is what you can pull out and if the Banker will let you do that, you sure are welcome to it.
If I were you, I will ask the Banker to deposit it into the Business account and then pull it out and deposit into the Salary Account. (Why ? Because it is me !)
DONE.
HEY HEY hold onto your horses... If the Selling price is 330K and the Buying price is 300K, you know you have made a profit of 30K on it. If you do not pull out any profits you made, by leaving the Mortgage in tact, then, your claim for 30K will hold good. But you have claimed for the payments and also Pulled out the profits, so what is outstanding as a balance in the mortgage is the amount that will enter into the picture. I know you paid the taxes on it. But the taxes you paid is for the income you made during that year. BUT NOT ON THE CAPITAL GAINS. So, YOU cannot 'DOUBLE DIP'.
PROPERTY Value appreciates. Mortgage amount and the value of the property in the BOOKS depreciates. Now if there is no transaction that reflects any withdrawals, then, the simple accounting process enters into the picture.
I am not your accountant, and I did not maintain your books. So, I will advice you to get in touch with an accountant and get it audited and then file your returns. It is dangerous for me to provide you with my views, for you to follow, because you cannot tell the Income Tax auditor, that a guy by name Full House told you to do this kind of book keeping.
If you follow simple procedures, then there will be NO COMPLICATIONS.
Remember in my last answer I said take a few items into account and make a list before you pull out any amount out of the mortgage, I mentioned about the re-evaluation of the property and legal fees, now, add the Accounting Expenses to it. And keep the list open for additional items too, few more will crop up after this.
FH
FH, Thanks lot for all details and I'll be in touch with accountant.
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Success is Never Ending and Failure is Never Final.
