Hiher Interest For Tax Breaks Vs. Low Interest That May Increase Capital Gain
I am a very green investor. I have just purchased a rental property and I am debating method of financing. Would I be better off with a higher interest rate and longer financing plan to increase my tax deductions for interest?
Also If I sell the property, is capital gain figured by determining the difference between purchase price - depreciation claimed and the sale price?
IMHO always take the lower interest rate.............and yes that is the basics of how they figure capital gains........
Why pay more interest so you can save in taxes...................
With depreciation and expenses you should be ok on taxes.....
Brian
RTFG[ Edited by BMan on Date 06/17/2004 ]
don't for get $1 in deduction turn into say $.40 in cash tax return.
Depends on rates and brackets of course.
Hey,
I think everyone would do well to buy a book on basic finance and accounting.
An expense (be it interest or advertising) is money LEAVING your pocket. And, except for the rare occassion, this is a BAD THING. You want money to STAY in your pocket.
Depreciation is a PAPER loss; money does NOT leave your pocket. Generally, depreciation is a GOOD THING because it lowers your taxible income for the year, WITHOUT money leaving your pocket.
Let's look at some examples.
Low Interest Example:
Rent $1000
Mortgage $500 (for this example we will exclude the fact that some of this is principal)
Other Expenses $100
Net Income $400 (that is in your pocket)
Depreciation $425 (I used a straight line depreciation model)
Taxable -$25
High Interest Example:
Rent $1000
Mortgage $600
Other Expenses $100
Net Income $300
Depreciation $425
Taxable -$125
So you end up with $100 less in your pocket.