It’s a perfect storm … in a good way. Mortgage interest rates hover near historic lows [Bankrate]. The value of stocks and other investable assets have plummeted in the wake of the coronavirus pandemic, with the Dow Jones Industrial Average index having lost nearly 18 percent of its value so far this year (as of market close April 16, 2020). Many families are looking for opportunities – and cash – to invest in this suddenly down market. Here’s where it all comes together. For families with substantial income to support a larger mortgage, who have significant equity in their homes, and are willing to take on market risk, the “perfect storm” described above presents an opportune time to put that equity to work and realize a tax deduction that can be far larger than they might expect.
Here’s how it works: First, with a “cash-out” refinancing, homeowners can renegotiate their mortgages and capitalize on low interest rates, currently below 4 percent across home loan types [Bankrate]. That can allow them to not only borrow more, but also access more of their home equity in the form of cash. Next, homeowners can reinvest that cash into the public or private markets. With many assets – stocks, real estate, private investments – anticipated to be at their most attractive valuations in years, now may be the time to capitalize on these investing opportunities. Finally, the icing on the cake is the potential for a tax deduction that goes beyond the normal mortgage interest rate deduction. How so? As part of the Tax Cuts and Jobs Act of 2017, the mortgage interest deduction limit was lowered from $1 million to $750,000. That means homeowners today can only deduct interest on up to $750,000 of qualified home loans [IRS].
However… for homeowners who pursue a cash-out refinancing, and who then reinvest that money into new investment opportunities, they can deduct not only mortgage interest on up to $750,000 of their loans, but also the amount they re-invest into other investment opportunities that qualify as interest-deductible by the IRS. Those include residential and commercial investment properties, stocks, non-tax-exempt bonds, and land. [IRS].
Take the following example*:
*This is an illustration and is not intended to imply or predict the performance of any investment product or future result. Actual allocations, investment solutions, managers, and fees are subject to change.
As illustrated above, for homeowners who have significant equity in their homes (a rule of thumb is typically no more than 60 percent loan-to-value), a cash-out refinancing can not only result in an attractive interest rate, it can also provide for a larger tax deduction when they re-invest their cash into qualified investment opportunities. It’s a “perfect storm” well worth exploring.
All right, title and interest in and to these materials are the sole and exclusive property of Cresset Manager, LLC, and its affiliates (collectively, “Cresset”).The information contained in these materials is not intended to provide professional, investment, legal or tax advice and should not be relied upon in that regard. The contents of these materials are for general information only and are not provided with regard to your specific investment objectives, financial situation, tax exposure or particular needs. The contents hereof are not a recommendation of, or solicitation for, the subscription, purchase or sale of any security, including the fund(s) and/or investment products mentioned herein. Nothing contained herein should be used as the basis for making any specific investment, business or commercial decision. You should carefully read the final prospectus, offering memorandum, organizational agreement and/or other supplemental and controlling documents before making an investment decision regarding any particular security carefully before investing in any security.Investments, including interests in real estate and private equity funds, are subject to investment, tax, regulatory, market, macro-economic and other risks, including loss of the principal amount invested. Investment denominated in a foreign currency are subject to factors including but not limited to changes in exchange rates that may have an adverse effect on the value of the investment. Past performance as well as any projection or forecast used or discussed in these materials are not indicative of future or likely performance of any investment product. Statements may be forward looking and are not intended as specific investment advice or guarantees of future performance. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such statements.The contents of these materials are subject to change and may be modified, deleted or replaced at any time in Cresset’s sole discretion. In particular, Cresset assumes no responsibility for, nor make any representations, endorsements, or warranties whatsoever in relation to the timeliness, accuracy and completeness of any content contained in these materials. While care has been taken in preparing the contents of these materials, such contents are provided to you “as is” and “as available” without warranty of any kind either express or implied. In particular, no warranty regarding suitability, accuracy, or fitness for a particular purpose is given in conjunction with such contents. Cresset shall not be liable for any loss, damage, costs, charges and/or expenses incurred as a result of or in connection with these materials or any reliance on the contents of these materials.The provision of any services or products provided by Cresset and/or its affiliates shall be expressly subject to the particular terms and conditions as contained in a separate written agreement with Cresset and/or its affiliate, as applicable. Cresset will not provide any individualized advice or consulting unless agreed to by a separate written agreement. Cresset Asset Management, LLC, provides investment advisory, family office, and other services to individuals, families, and institutional clients. Cresset Partners, LLC, provides investment advisory services strictly to investment vehicles investing in private equity, real estate and other investment opportunities. Cresset Asset Management, LLC, and Cresset Partners, LLC, are SEC registered investment advisors.
Cresset specializes in Intelligent Wealth Management® for CEO Founders, Entrepreneurs, PE Partners and High-Net-Worth Families. Our Family Office goal is to simplify and elevate your life so you have more time to spend on what matters to you most.