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How Much to Put Down When You've Got Extra Cash

Mortgage Library: Ask a Mortgage Related Question: Answers: How Much to Put Down When You've Got Extra Cash


My husband and I are doing a Starker exchange. We are purchasing a beach house to use as a rental property and are rolling the gains from the sale of his condo into the new house. Those funds, of course, MUST be invested in the new property to avoid capital gains taxes, and they will cover about 35% of the purchase price. We have additional cash, some sitting in mutual funds, tax-exempt bonds, and money markets, and I'm wondering how much additional cash, if any, it makes sense to put down, considering the tax benefits of financing and the opportunity cost of taking the money out of where it's sitting now. We're thinking of taking out a five-year ARM, at ca. 4.875%, but I don't think it's just a matter of asking whether the monies are earning that elsewhere. I don't know how to figure in the tax benefits or any other considerations (e.g., I've heard it said by a non-tax professional that the IRS frowns upon financing a real estate purchase in order to get the deduction while tying up significant cash in tax-exempt vehicles). How do we sort this all out??



Hi K.,

Congrats on your new beach house investment property. I'm not a CPA, but it would seem like you are doing the prudent thing by simply leaving the downpayment at 35% to avoid the capital gains tax. I'm not sure what your monthly rental income is, but i would base my decision on liquidating any other tax exempt funds on how much I'm netting on what's coming in vs. what's going out on a monthly basis.

if you have some tax exempt funds that aren't producing as well as you'd like, and you're concerned the IRS may find a reason to snoop, I'd liquidate them and put them towards the downpayment. That you have a smaller loan, thus netting more rental income which you can perhaps use to reinvest or reduce high non deductible interest debt (credit cards..) you may be carrying..

Just a thought,

Good luck!

Craig Hesselberg
888 391-0003
Licensed Virginia Lender

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