Paying off rental?

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Callalily
Posts: 32
Joined: Wed Dec 16, 2009 11:42 am

Paying off rental?

Post by Callalily »

My husband and I bought our house in 2008 and then moved to another state for my job. We're currently renting out our home and renting an apartment in our new state. I've recently come into an inheritance that pays off our house if we so desire. We don't intend to purchase a home in our new state for 5 years at least.

I understand that we would be trading cash for an illiquid investment, but tax-wise, there's really no difference between paying mortgage interest or giving to charity or funding our 401K, right? In other words, all 3 scenarios are tax-deductible?

I go back and forth between keeping the cash and having higher ROI vs. paying off the rental (and then using the income to beef up our retirement ... we also really hate debt but maybe that's a different question).

Advice please!
Honobob
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Re: Paying off rental?

Post by Honobob »

Callalily wrote: keeping the cash and having higher ROI vs. paying off the rental (and then using the income to beef up our retirement ... we also really hate debt but maybe that's a different question).

Advice please!
Umm, your retirement is already 2012 "beefed" wiith your money that you would foolishly pay off debt that isn't due for 27 years!! So you want to lock up 2012 dollars to collect 2012-2013,2014, etc dollars to slowly, incrementaly beef up your retirement?!! Doesn't sound like a responsible plan.
It's slowly dawned on me that we won the real estate lottery!
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White Coat Investor
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Re: Paying off rental?

Post by White Coat Investor »

I'd max out retirement accounts and an emergency fund before paying down the debt. But it isn't a bad use of the cash.

What's your effective after-tax mortgage rate?

You could also leverage up, buying a couple more properties....

Lots of options, and it doesn't have to be one or the other. You can always pay down part of the loan and invest part of the money.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
Callalily
Posts: 32
Joined: Wed Dec 16, 2009 11:42 am

Re: Paying off rental?

Post by Callalily »

My effective after-tax mortgage rate for 2011 is probably 3.46% but it could be 3.93% for 2012.
travellight
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Location: San Diego

Re: Paying off rental?

Post by travellight »

I would probably not pay it off as much as I hate debt. The opportunities for better use of the money as mentioned above would outweigh my hatred of debt.
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specabecca
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Re: Paying off rental?

Post by specabecca »

Rentals are funny - some years they are headache free, rent like a dream, and you wonder why you don't have more properties. Other years, you think you were flat stupid to have put yourself in such a situation.

The point is that rental income fluctuates, where as rental mortage/insurance/taxes are dead consistent. Either you need a healthy cushion to take the 'gee, we need a new roof, we've got deadbeat renters to evict, and the neighbors just took a chainsaw to the side fence because <fill in crazy rationalization here>.' It may help your peace of mind and your ability to weather the storm if you go ahead and pay that rental off entirely. Then, 100% of rental income could go into beefing up cash cushions and funding other savings/investment vehicles.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Paying off rental?

Post by Valuethinker »

Callalily wrote:My husband and I bought our house in 2008 and then moved to another state for my job. We're currently renting out our home and renting an apartment in our new state. I've recently come into an inheritance that pays off our house if we so desire. We don't intend to purchase a home in our new state for 5 years at least.

I understand that we would be trading cash for an illiquid investment, but tax-wise, there's really no difference between paying mortgage interest or giving to charity or funding our 401K, right? In other words, all 3 scenarios are tax-deductible?

I go back and forth between keeping the cash and having higher ROI vs. paying off the rental (and then using the income to beef up our retirement ... we also really hate debt but maybe that's a different question).

Advice please!
how you finance the asset is separate from whether you have an asset.

Depending on after tax return, I would probably pay off the rental. But since normally the mortgage is offset against the rental income for tax purposes (true in USA?) I would keep the debt to the extent it shielded my rental income against tax.

Your alternative investment opportunities are low return or higher risk. But if there is tax exempt space you are not grabbing, you should grab that first.

Just make sure this is all separate in your head (paying off the debt) from the decision whether or not to keep owning this house, or to sell it. What matters is whether you are a landlord, not how you choose to finance that (ie straight equity or equity plus debt).
Valuethinker
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Re: Paying off rental?

Post by Valuethinker »

Callalily wrote: I understand that we would be trading cash for an illiquid investment, but tax-wise, there's really no difference between paying mortgage interest or giving to charity or funding our 401K, right? In other words, all 3 scenarios are tax-deductible?

Advice please!
I am not USian but you really need to nail this re taxes.

In other countries, rental landlords get full deductibility of mortgage costs, and some maintenance costs (others are used to increase the cost basis of the property ie lower capital gains) from the property.

The trick, such as it is, in rental real estate is to engineer it so you pay no tax on the investment whilst it is rented out.

You need to speak to an accountant I expect to confirm all this.
john94549
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Re: Paying off rental?

Post by john94549 »

I would agree with others that you should obtain input from a tax professional before doing anything. For example, if your MAGI is less than $150K you may deduct losses (both real and as a result of depreciation) against your other income, up to a maximum of $25K/year. If your depreciation and other expenses do not permit you to "max out" your $25K, you may wish to keep some (but not all) of the rental indebtedness. It gets complicated.

In addition, historically, an interest rate of 4% or less on investment (rental) property debt is quite good.
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