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?

Comments(3)

  • BMan17th June, 2004

    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 ]

  • cjmazur17th June, 2004

    don't for get $1 in deduction turn into say $.40 in cash tax return.

    Depends on rates and brackets of course.

  • Bruce18th June, 2004

    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.

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