ppt79 wrote:400k @ 28 years 4.675
230K @ 30 years 5.125
Tax Rate 33% Federal, 6.37 State
Can you deduct the mortgages on your state taxes? I suspect you live in NJ, given that the tax rate is 6.37%. NJ doesn't allow deductions for interest on a home mortgage, but does for a mortgage on a rental property if you deducted it on Schedule E.
If you can deduct only the 5.125% mortgage on your state taxes, then the effective tax rate is 3.21% on that mortgage (37.25% combined federal and state tax bracket), and 3.13% on the 4.675% mortgage (33% federal bracket only). Even so, those rates are low enough that is probably worth keeping both mortgages as long as they are deductible. However...
I did show a loss on the property this year on the schedule E but can't take advantage due to my income. The plan was to bank the losses and use them to offset any potential capital gain I may have in the future when we decide to sell.
This is not as valuable a benefit. When you sell, your capital gain will be taxed at 19.25% (15% federal, 6.37% state deducted from federal). Thus, if you carry over a $1000 loss to offset a subsequent capital gain, you are saving $193 in taxes in some future year, which is not even as valuable as saving $193 in taxes this year. Even if the losses offset future income, $373 in some future year is worth less than $373 in this year. And the longer it is until you sell, the less the tax savings is worth; this counteracts the fact that the benefit from paying down the mortgage is also less valuable.
Thus, I would recommend paying down the rental mortgage up to the point at which the rental breaks even for tax purposes. Once the rental is breaking even, reducing the mortgage interest by $1000 saves you $373 in tax in the current year, and then it is worth keeping the rental mortgage.