Many areas of the U.S. have seen tremendous increases in housing prices recently. Similar appreciation has occurred in homes held for investment. If you own rental property that has appreciated, you stand to gain from tax-free refinancing.
As a rule of thumb, lenders will offer 80 percent, loan-to-value financing. Suppose, for example, you bought investment property a few years ago for $200,000, taking out a $160,000 mortgage. Now the house has grown in value to $300,000.
You probably can increase your mortgage to $240,000–80 percent of $300,000. If you originally borrowed $160,000 to buy the property, you can pay off that loan with the new one. Then the extra $80,000 can go right into your pocket. You’ll owe no tax on the loan proceeds.
It’s true that you’ll be paying off a $240,000 loan instead of one for $160,000. However, if the property has appreciated, that probably indicates rents have increased so you may be able to carry the extra debt service.
