Here's an interesting academic question that I can't quite get my head around. I currently have a $28,000 balance on a $28,400 HELOC I took out this spring to make substantial improvements to my rental house (I built a new garage for it). This HELOC is a variable interest loan and I'd have to check, but I'd say it's somewhere around 8%. Since the loan was used for improvements (and not just buying a boat or a plasma TV) I'm assuming that the interest I pay on the loan is going to be tax deductable. Now, I'm getting ready to do a App-O-Rama (I'm writing the thread now) and expect at least $50,000 in 0% BT promos. I was planning on putting all of it in my Emigrant Direct Savings account which currently gets something like 5.15%. Since this is a savings account, the interest earnings will be taxed at my rate which is 25%. So I'm thinking: academically, is it a better idea to keep my personal and rental finances separate and just invest my BT money in the Emigrant account. This would yeild me 5.15% MINUS taxes on interest earned. --OR-- Use the BT money, pay off the HELOC (for 12 months), make my ordinary payments (around $250/mo)to the credit card, using the 0% promo to accelerate the pace at which I'd be paying down the HELOC. Wouldn't that effectively net me around 8.25% (the HELOC interest rate) MINUS whatever the tax benefits would be from deducting the HELOC interest (currently about $130/mo if memory serves)?
I've been real good at keeping my rental finances separate from my personal finances and so that's the main reason why I'm hesitant. I also cannot get my head around whether or not this move is smart or not.
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I certainly would do the BT without hesitation. Just look at your return. If you tranferred the cash to Emigrant, you'd end up with 3.86% after taxes. If you pay off your HELOC, you're essentially realizing 6.19% after taxes. No comparison.
rasher said:I've been real good at keeping my rental finances separate from my personal finances and so that's the main reason why I'm hesitant. I also cannot get my head around whether or not this move is smart or not.FWIW, I do this systematically, with many BT promos, several properties, and around 20x the size of helocs. I've had no issues whatsoever, and there are many benefits to this strategy. Surplus money that doesn't pay the HELOCs completely off goes to high-yield savings.
The co-mingling of funds issue is a concern, but just be careful not to mix personal purchases with these BTs and those HELOCs, and you should be fine.
It would be different if you had an interest in a corporation that owned the property..then more formalities would have to be observed.
You should also be aware that the secured debt looks better on your credit report than unsecured debt will--but I'm expecting you know that.
I just did something similar. Had about $75k outstanding on the HELOC that is on my residence. I took out the HELOC to buy the rental property.
Regarding you comment on the deductibility of the interest, my undrestanding is that you can have up to $100k in debt on a HELOC and use that for anything and still deduct it as your typical mortgage interest. So if your HELOC is secured by your residence, I don't think it matters what you used that $28.4k for. But it was a bit unclear from your post as to which property was securing the HELOC.
Anyhow, I did a mini AOR and transfered about $60k of that HELOC (which was about 8% interest) over to the 0% balances. So I lose the deduction on the interest I was paying on the HELOC but gain by saving about $400/month in interest payment I no longer have to make.
I have done this with my HELOC. I would only add (and you may already know this) that you should keep the HELOC open. If something were to trigger the default rate on any those credit cards, you could move the money back into the HELOC quickly.
rasher said:Use the BT money, pay off the HELOC (for 12 months), make my ordinary payments (around $250/mo)to the credit card, using the 0% promo to accelerate the pace at which I'd be paying down the HELOC. Wouldn't that effectively net me around 8.25% (the HELOC interest rate) MINUS whatever the tax benefits would be from deducting the HELOC interest (currently about $130/mo if memory serves)?
I've been real good at keeping my rental finances separate from my personal finances and so that's the main reason why I'm hesitant. I also cannot get my head around whether or not this move is smart or not.Since I don't see this mentioned in other threads, this my be one of the few opportunities where the BT fee (3% or whatever) may be deductible either as an expense or amortized on your schedule E (like re-finance points).
If you are certain that you can either pay this off before the BT expires or get another BT to move it to when the promo rate expires, do it.
Hey, thanks alot you all. I appreciate the advice.
CLIFF'S NOTES: 0% BT to high-yield savings = 3.86% APR after taxes 0% BT to pay down 8% interest HELOC secured by investment property = 6.19% APR after taxes
The HELOC in discussion here is secured by the rental house.
I do not intend to close the HELOC if I use 0% BT to pay down the principal. Having $28,000 of secured credit availble instantly is a nice feeling, regardless of how painful it is to use interest-wise.
Interesting comment on the BT fees possibly being tax deductible. 3.00% BT fee minus tax deduction (for my tax bracket: 25%) equals 2.25% net BT fee. Better, but I'm going for zero or at worst 3%-up-to-$75 BT fees.
I suppose I could expand the discussion by explaining my strategy: In the next 5 or so years, I'd like to either buy some land to build a house OR buy some more rental propoerties (still kind of waffling over whether or not I can stomach being a landlord, but that's a different discussion). Whereas in the past, we'd (wifey and I) assumed we could just sort of rely on property value increases to grow our relative equity and then obtain secured financing (HELOCs) based on reappraised primary and/or rental houses. Well, obviously the skyrocketing property value days are numbered and so my idea now is to pay off existing debt to free up availble (secured) credit for future property acquisitions. Also, all of you app-o-rama-nnites have got me thinking about better (read:faster) ways to do this...
I don't intend to do anything finance-wise in regards to real estate for at least 12 and probably more like 24 months, so I'm hoping the Credit Report hit I take for an app-o-rama will have cleared itself up by then. I'm currently sitting on about a 786 FICO, and like some say: if you don't "spend" it, what's the point of having it?
Wifey's FICO is probably higher than mine, she's the sole owner of her (our) primary residence, and wants nothing to do with my app-o-rama (for now... heh heh) and so we can always tap her credit availablity if needed.
Anyway, I'm in the process of preparing a detailed app-o-rama diary and will attempt to move this discussion over there when I can get it posted.
If you pay off the HELOC, you gain a less tangible benefit (however trivial it may be). With no interest related deduction for your investment property, you will have one less line on your taxes that can be potentially audited.
The commingling of the money is not that significant (since you are sole proprietor), unless you planned to draw on the HELOC at the end of the 12 months to pay off the CC (in which case I don't know what the impact of that would be or what recordkeepping would be required).
Also: Since I'm leaving the HELOC open, when the 0% BT promo period is over, even if I can't get more 0% credit, I'll just pay off the CC balances with the HELOC and go from there. I will have gained a year of paying down principal faster. -------------------------------------------------- Update on my HELOC (I'm looking at the statement): Outstanding Balance: $28,250 Minimum Payment Due: $192.00 (<-this is interest ONLY) Monthly Payment (Total rent minus primary mortgage, interest, and bank fees): $296.00.
CURRENT SCENARIO Therefore, as of this month, I'm paying $192.00/mo in interest and $104.00/mo in principal. HELOC Total annual interest = $2304.00 HELOC Interest tax deduction = $576.00 (This amount would be sent in as extra principal payment) HELOC Annual principal paydown = $1248.00 HELOC Outstanding Balance after 12 months = $26,426.00
PROPOSED 0% BT SCENARIO I'd be paying $296.00/mo to whatever CC I have a 0% BT balance with, and leave the HELOC open. CC Total annual interest = $0.00 CC Interest tax deduction = $0.00 CC Annual principal paydown = $3552.00 CC Outstanding Balance after 12 months = $24,698.00
RESULTS Difference in HELOC versus CC balance after 12 months= $1,728.00 APR yield for using 0% BT = 6.12%
BUT.... WHAT IF I HAVE TO PAY A 3% BT FEE? I'd be paying $296.00/mo to whatever CC I have a 0% BT balance with, and leave the HELOC open. BT Fee on $28,250 = $848.00 Assume 15% APR on BT Fee = $127.00 Total Fees and Interest on BT = $975 BT Fee tax deduction = $244 (This amount would be sent in as extra principal payment) CC Annual principal paydown = $2821.00 CC Outstanding Balance after 12 months = $25,429.00
RESULTS Difference in HELOC versus CC balance after 12 months= $997.00 APR yield for using 0% BT = 3.53% Therefore: 0% BT, even with fees is good, but not great
gatzdon said:If you pay off the HELOC, you gain a less tangible benefit (however trivial it may be). With no interest related deduction for your investment property, you will have one less line on your taxes that can be potentially audited.
The commingling of the money is not that significant (since you are sole proprietor), unless you planned to draw on the HELOC at the end of the 12 months to pay off the CC (in which case I don't know what the impact of that would be or what recordkeepping would be required).
Two good points, that. 1. I will still be deducting primary mortgage interest, so I suppose the audit-reducing benefits are closer to nullified. 2. I had not thought at all about what happens at the end of the 0% BT promo. I intended to draw on the HELOC to pay off the CCs as a last resort, assuming there was no more 0% to be had. But going up a few posts, it sounds like it MAY not matter what you use the HELOC draw to pay if its less than $100,000... Maybe someone else could jump in.
CLIFFS NOTES: Currently my HELOC has been used to improve my investment property and so the interest paid is tax-deductible. If I use 0% BT to pay off the HELOC for 12 months, and then use the HELOC to pay off the CCs after the promo, then would the interest paid on the HELOC once again be tax deductible?
rasher said:gatzdon said:If you pay off the HELOC, you gain a less tangible benefit (however trivial it may be). With no interest related deduction for your investment property, you will have one less line on your taxes that can be potentially audited.
The commingling of the money is not that significant (since you are sole proprietor), unless you planned to draw on the HELOC at the end of the 12 months to pay off the CC (in which case I don't know what the impact of that would be or what recordkeepping would be required).
Two good points, that. 1. I will still be deducting primary mortgage interest, so I suppose the audit-reducing benefits are closer to nullified. 2. I had not thought at all about what happens at the end of the 0% BT promo. I intended to draw on the HELOC to pay off the CCs as a last resort, assuming there was no more 0% to be had. But going up a few posts, it sounds like it MAY not matter what you use the HELOC draw to pay if its less than $100,000... Maybe someone else could jump in.
CLIFFS NOTES: Currently my HELOC has been used to improve my investment property and so the interest paid is tax-deductible. If I use 0% BT to pay off the HELOC for 12 months, and then use the HELOC to pay off the CCs after the promo, then would the interest paid on the HELOC once again be tax deductible?
Interest for a HELOC on a rental property is treated seperate from interest on a HELOC for your primary residence. I don't know all the differences, but I believe interest for the HELOC on the rental is used to offset income from the rental, interest for a HELOC on your primary residence is deducted from your AGI and reported on Schedule A.
Don't erroneously apply rules that apply to interest for a loan secured by a primary residence. Make sure the rules cited above apply to your situation. For that matter, don't ever rely solely on any advice you ever read on FW. When it comes to the IRS, always find and save the publication that justifies how you handle your taxes (whipping out a post from FW during an audit will probably do more harm than good).
Ah, you are correct about interest offsetting income. I seem to forget these small details the farther away tax time recedes. So in essence, if I use 0% BT to pay down the HELOC, then the $192 a month in interest payments that I was previously reducing my rental income by is now considered income. Therefore: $900/mo rent - $192/mo interest on HELOC = $708/mo income (This is greatly simplified, BTW). With 0% BT, I would have additional $192/mo income. So if my tax bracket is 25%, the I'd be paying $576 a year more in taxes. So
CURRENT SCENARIO Therefore, as of this month, I'm paying $192.00/mo in interest and $104.00/mo in principal. HELOC Total annual interest = $2304.00 HELOC Tax return due to income reduction of income = $576.00 (This amount would be sent in as extra principal payment) HELOC Annual principal paydown = $1248.00 HELOC Outstanding Balance after 12 months = $26,426.00
PROPOSED 0% BT SCENARIO I'd be paying $296.00/mo to whatever CC I have a 0% BT balance with, and leave the HELOC open. CC Total annual interest = $0.00 CC Interest tax deduction = $0.00 CC Annual principal paydown = $3552.00 CC Outstanding Balance after 12 months = $24,698.00
Ah, you are correct about interest offsetting income. I seem to forget these small details the farther away tax time recedes. So in essence, if I use 0% BT to pay down the HELOC, then the $192 a month in interest payments that I was previously reducing my rental income by is now considered income. Therefore: $900/mo rent - $192/mo interest on HELOC = $708/mo income (This is greatly simplified, BTW). With 0% BT, I would have additional $192/mo income. So if my tax bracket is 25%, the I'd be paying $576 a year more in taxes. So
CURRENT SCENARIO Therefore, as of this month, I'm paying $192.00/mo in interest and $104.00/mo in principal. HELOC Total annual interest = $2304.00 HELOC Tax return due to income reduction of income = $576.00 (This amount would be sent in as extra principal payment) HELOC Annual principal paydown = $1248.00 HELOC Outstanding Balance after 12 months = $26,426.00
PROPOSED 0% BT SCENARIO I'd be paying $296.00/mo to whatever CC I have a 0% BT balance with, and leave the HELOC open. CC Total annual interest = $0.00 CC Interest tax deduction = $0.00 CC Annual principal paydown = $3552.00 CC Outstanding Balance after 12 months = $24,698.00
I wouldn't bother with the BT to your HELOC if you have to pay a 3% fee. It sounds like there will still be a window with most BTs in 2006 to avoid the 3%. For 2007, it's looking more ominous
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