i konw that US residential mortgages interest is tax deductible. would you guys know if the same holds for commercial loans, like commercial real estate or c&i loans? thanks!
Why wouldn’t interest be deductible, just like any other business expense. The residential mortgage deduction is special because it’s your income that’s taxed, not your net profit after living expenses. In a business, the general idea is that only profits are supposed to be taxed, not revenue. In the residential case, income tax is basically a tax on your personal revenue, not your personal profits. The residential mortgage deduction basically lets you treat that kind of expense in the same way it would be if you considered your home a business expense. In residential stuff, rent doesn’t get this treatment, but in a business, it does. So owning a home can be really good for you after taxes, but only if you are aware of the extra capital gain/loss risk that you expose yourself to.
thanks bchad! does the following sound right to you? i guess it means that there really isn’t much of an incentive to partially prepay your mortgage then, because you would lose out on being able to deduct the interest from your mortgage. if rates are low enough, you would be much better off refinancing with a lower rate. this would hold for both commercial and residential mortgages then. thanks!
I haven’t thought about that calculation much since I got into this field. My simplistic analysis used to be that if your mortgage interest rate is higher than the best alternative investment, then pay down your mortgage. That’s still basically right, but now I’d add in two things 1) a “for the same level of risk” qualification, since some investments might yield more but also be riskier, and 2) it’s also true that you’d have to consider the benefit of the mortgage deduction. So if you have cash for paying down your mortgage, you’d want to do it if there are no other attractive uses for cash that yield more than [Mortgage interest rate]*(1-[marginal tax rate]) and less or equally risky than sticking with your mortgage.
thanks bchad!
fyi commercial loans typically you can not refi like residential. If you want to repay the loan, you typically must defease. Defease is where you replace the cash flow of the loan with qualified cash flows (typically US Treasuries or qualified Fannie Mae MBS). See wiki entry for defeasance: http://en.wikipedia.org/wiki/Defeasance
thanks willsucceed! so i guess i should expect to be lower CPR’s for commercial loans than mortgages