Real Estate

Debt Conversion Calculations (pay off vs invest)

  • Last Updated:
  • Apr 5th, 2019 9:21 pm
[OP]
Sr. Member
Sep 14, 2007
898 posts
306 upvotes

Debt Conversion Calculations (pay off vs invest)

I have a primary residence and rental unit. The rental unit is due for mortgage renewal. I was thinking of borrowing the max HELOC on the rental, so some of it goes to the residual mortgage on the rental, and the remainder to pay down the balance on the primary.
The interest on the HELOC becomes a deductible expense where as the interest on my primary is not deductible. So financially that makes sense to do, however, the other argument is, what if I took that remainder and instead of paying down the primary, I add it to my investment portfolio. If my rate of return on my portfolio (after inflation, capital gains tax, fees and marginal tax bracket) is higher then the cost of the HELOC (let's say it's roughly the 5 year fixed rate, which we can get 3.15%), then it's a matter of determining whether the risk of volatility in the portfolio is worth the possible incremental gain through the markets. Is my line of reasoning missing some assumptions?
Can someone show me the math with some hypothetical back of the napkin numbers?
1 reply
Deal Guru
Feb 22, 2011
10131 posts
12539 upvotes
Toronto
If you take out a HELOC on the rental and don't invest the money it is not tax deductible. The source of the funds is irrelevant to what is or is not tax deductible, what is relevant is how the funds are used.

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