Borrow more, invest more, deduct more

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.

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About Cresset

Cresset is an independent, award-winning multi-family office and private investment firm with more than $45 billion in assets under management (as of 04/01/2024). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.

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