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Smart to refi rental property?
Want to reduce my taxes and use $200k to to fund an annuity.
Statistics: Married filing joint
Current rental property appraised value: $400k
Income: $190k of which $21k is from positive rental income.
Current mortgage/taxes/ins: $90k $940/month payment
Rent: $1800/month Current mortgage interest rate: 4.25% on 90k
Rental in California reside in Virginia.

Want to pull $200k for total refi of $290k at a 4.85 interest rate.

Doing so reduces my positive rental income to about $1200. So I get the equity out to use as an investment paying 4.85% weighed against getting it at $21k (the positive rent) a year and paying income tax on that amount.

Does it make sense to refi?

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    Most annuities show large rates of interest as illustrations of how much your investment will grow, but be sure to read the fine print that shows the guaranteed rate of interest. Investments in tax-deferred annuities are generally beneficial to the selling agent and the insurance company and only rarely to the investor, and so: Beware! or Be aware. – Dilip Sarwate Jun 24 '15 at 10:41
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You need to do a bit more research and as @littleadv often wisely advises, consult a professional, in this case a tax layer or CPA. You are not allowed to just pull money out of a property and write off the interest.

From Deducting Mortgage Interest FAQs

If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.

This is not exactly your situation of course, but it illustrates the restriction that will apply to you.

Elsewhere in the article, it references how, if used for a business, the interest deduction still will not apply to the rental, but to the business via schedule C.

In your case, it's worse, you can never deduct interest used to fund a tax free bond, or to invest in such a tax favored product.


Putting the facts aside, I often use the line "don't let the tax tail wag the investing dog." Borrowing in order to reduce taxes is rarely a wise move. If you look at the interest on the 90K vs 290K, you'll see you are paying, in effect, 5.12% on the extra 200K, due the higher rate on the entire sum. Elsewhere on this board, there are members who would say that given the choice to invest or pay off a 4% mortgage, paying it off is guaranteed, and the wiser thing to do. I think there's a fine line and might not be so quick to pay that loan off, an after-tax 3% cost of borrowing is barely higher than inflation. But to borrow at over 5% to invest in an annuity product whose terms you didn't disclose, does seem right to me. Borrow to invest in the next property? That's another story.

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