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Or is is a maintenance question? I am planning on refinancing my mortgage and taking cash out, then using the cash in the near future to buy a new home for my family, while keeping the old one to rent out. My question is, the old home (my current home) looks like it needs a new roof. Is there some way I can pay for the roof that is more tax advantageous? Out of pocket money now? With the cash I get from the refi? Wait till next year? Consult a tax professional? Thanks in advance.....;)

Mike in NJ
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Cash used for new work on the original house from the refinancing would be home acquisition debt(interest on first million deductible). However, cash taken from that refinancing secured by that house used to purchase another house would not be home acquisition debt. Home acquisition debt must be secured by a mortgage on that housing unit. It would be a home equity loan(only $100,000 deductible for ordinary tax, none on AMT). So I think you might reconsider that refinancing.
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Hmmm, well the plan is to buy a new home, and keep the old one. With the refi I would go down 3/4% in interest and take out $30K in cash, which I thought I could use for both a downpayment on the new home and to fix the roof here. (I don't have the quote yet, but this is a small home, I can't imagine the roof being more than $3000).

Are you saying it might be better to take a home equity loan out for $30K and then proceed with the original plan, instead of refinancing?

Thanks!

Mike in NJ
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Correction: The interest on only the first $100,000 is deductible, but not for AMT, not the amount of the loan, nor $100,000 interest.
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Cash used for new work on the original house from the refinancing would be home acquisition debt(interest on first million deductible). However, cash taken from that refinancing secured by that house used to purchase another house would not be home acquisition debt. Home acquisition debt must be secured by a mortgage on that housing unit. It would be a home equity loan(only $100,000 deductible for ordinary tax, none on AMT). So I think you might reconsider that refinancing.

Replacing the roof on the original house is a repair. So, holding off until the house is in service as a rental would get you some tax benefit.

For reference look up the Oberman case (47 TC 471).

Ira
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The IRS definition of "home equity loan" differs from that the bank uses. For taxes, any loan secured by the primary or one secondary residence house and recorded as such by the county qualifies as home equity loan for that portion not used for home acquisition debt on that house. So cash-out not used for home improvement would qualify as the home equity loan regardless of whether you refinance the existing mortgage or borrow only $30,000.

Back to the original question of roof expensing vs. capitalization. The IRS has consistently taken the position that a new roof is a capital expense(recoverable for owner rental or business use by depreciation). The tax courts have equally consistently held that a simple roof replacement of similar construction would be maintenance, expenseable in current year by owner of a rental. Of course, this treatment is useless if roof is repaired for a owner-occupied unit. So, if you can wait until the rental is ready for occupency before you replace the roof, and your income is such that you can use the immediate expense, and are willing to spend a day in the small claims division of tax court pro se, you might save a few hundred dollars net gain in taxes by immediate expensing of the roof as maintenance. Probably too complicated for a $3000 roof.
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