We’ve spent the last few episodes talking about “The Exit” – using 1031 exchanges and DSTs to sell without tax. But what if the best move isn’t to sell? What if the best move is to extract your wealth while keeping the asset, using debt as revenue to generate liquidity? In this episode of the 5-Minute PRIME Podcast, host Martin Maxwell executes the pivot from “Exit Strategy” to “Liquidity Strategy.” We are opening the playbook on “Strategic Refinancing,” the exact mechanism the ultra-wealthy use to live on tax-free debt while their assets appreciate.
Tune in to learn:
- The “Accession to Wealth” Secret: Why the IRS treats a $200,000 loan completely differently than a $200,000 paycheck (and why you pay $0 tax on it).
- The “Tracing” Trap: The obscure Treasury Regulation (§ 1.163-8T) that can disqualify your tax deductions if you put your refinance money in the wrong bank account.
- The S-Corp Landmine: Why holding real estate in an S-Corp (instead of an LLC) turns a tax-free refinance into a massive taxable event.
- The 2025 “Golden Window”: Why locking in liquidity now—before the 40% Bonus Depreciation cliff on December 31st—is the ultimate year-end power move.
Are you ready to stop treating debt like a liability and start using it like a tool? Subscribe now for the masterclass.
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Show Notes: Debt as Revenue
Key Takeaways
- The “Buy, Borrow, Die” Advantage: Selling a property triggers Capital Gains and Depreciation Recapture, potentially shrinking your wealth by 25%. A Cash-Out Refinance provides debt as revenue, offering tax-free liquidity because debt is not considered “income” (no accession to wealth). This allows you to access equity while the asset continues to grow.
- The Tracing Trap (Treasury Reg 1.163-8T): The IRS determines interest deductibility based on the use of the funds, not the collateral. Using rental loan proceeds for personal expenses makes the interest non-deductible. Commingling funds creates a “Mixed Mess” that rarely survives an audit—so even when using debt as revenue, a clean structure is essential.
- The “Clean Conduit” Strategy: To ensure deductibility, wire refinance proceeds directly into a new, segregated checking account. Deploy funds for investment directly from this account to create an unbreakable paper trail. This step is critical whenever you are leveraging debt as revenue in your portfolio.
- The S-Corp Landmine: Holding rental properties in an S-Corp is dangerous. S-Corp shareholders do not get basis for third-party debt. A cash-out distribution that exceeds your stock basis will trigger immediate Capital Gains tax, turning what could be debt as revenue into a taxable event.
- 2025 Rate Arbitrage: Leveraging at current rates (~6.5%) to acquire assets before December 31st allows you to capture the 40% Bonus Depreciation rate before it drops to 30% in 2026.
Action Step:
- Open a Segregated Account: Before closing a refinance, open a brand new, empty checking account specifically for the loan proceeds.
- Instruct the Title Company: Give explicit instructions to wire the funds directly to the segregated account. Do not let the funds touch your personal checking.
- Verify Entity Structure: Review your portfolio with a professional to ensure no appreciating real estate is held inside an S-Corp before refinancing; if it is, pause immediately and seek legal counsel. Protecting your debt as revenue flow is essential.
- Start the Loan Application Now: If you intend to use this strategy for the 2025 tax year, initiate the application immediately to account for lender slowdowns in December.
Mentioned in This Episode
Episodes to Revisit:
Strategies:
- 1031 Exchanges & Delaware Statutory Trusts (The Exit)
- Buy, Borrow, Die (Wealth Preservation)
- Interest Tracing (Treasury Regulation 1.163-8T)
- Rate Lock Arbitrage
Concepts:
- Depreciation Recapture
- Realized Gain vs. Accession to Wealth
- Bonus Depreciation (40% vs. 30%)
- Step-Up in Basis
Challenge for Today:
- Perform a “Balance Sheet Audit”: Review your portfolio to identify properties with significant equity (50-60%) that is currently earning 0% ROI.
- Calculate Safe Liquidity: Determine exactly how much cash you can pull out of that property while maintaining a safe Loan-to-Value (LTV) ratio.
- The Deployment Test: Ask yourself: “Can I deploy this capital (over $50k) into a new deal before December 31st to secure a tax break?” This ensures your debt as revenue works efficiently.
- Execute: If the math works and the timeline is feasible, call a lender today to get a quote.
