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Paying down mortgage in High Tax/High COLA

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  • Paying down mortgage in High Tax/High COLA

    Given the SALT deduction cap do you think it would be better to:

    a) pay down investment property with intent to sell within next few years?

    b) pay down primary residence?

    c) pay minimum on mortgages and invest in taxable account for future vacation/rental property vs save for remodel on primary residence?

    d) sell investment property and pay down primary residence?

    Thanks and I appreciate any insights/advice!

  • #2
    You're cash flow positive by $300 per month, but right now you'd take a $30K hit if you sold the investment property?  Assuming you don't have any unexpected extraordinary expenses, you'll make 48 months X $300 = $14,400 over the next four years.  That covers half the amount of your projected loss.  You may see some appreciation over the next four years, or the market might tank.

    Do your cash flow projections on the rental property include a reasonable allowance for vacancy and maintenance? Would you still cash flow positive if you refinanced to a 30 year fixed mortgage on the rental?

    The rental property looks like the thorniest problem to solve.  Leaving that aside, the mathematically correct answer over the long term is to max out all tax favored accounts, then throw the excess money into taxable accounts rather than paying down the properties.  That said, if you're going to live in your primary residence long term, I might put a third or half of your extra money into your house and put the rest in taxable.


    • #3
      The new tax laws and SALT limits have NO direct impact on mortgage interest or on your rental income on Schedule E.

      We have opted to pay minimums on rental and primary properties and maximize taxable investing as we believe the long term returns there will maximize our wealth. Others feel and do differently.

      I observe that if you plan to sell the rental within the next few years, why not sell it now? If it's a good investment property, why sell it at all?

      We save around what you save and have a rental financially similar to yours. We see no reason to pay it down quickly.


      • #4
        -On the rental - why sell at a loss with positive cash flow and ability to right down depreciation too?

        -with 100K+ a year flowing into tax deferred, you'll be heavy on equities --- Another reason on the inquiry on selling the property.


        • #5
          a, b, c, d are are correct answers.  If you can predict the bond and equity markets, you would know which is the MOST  correct. Since you can not predict, all of the above are correct.


          • #6
            With regard to the primary residence, other than the usual pay mortgage vs invest decision, I'm trying to figure out what the tax and cost-of-living really have to do with it.  Are the two somehow linked with any benefit you might get from paying the mortgage?  Your the value on which the house is appraised for tax purposes doesn't have anything to do with how much is left on your mortgage or how much interest accrues, and money put into the loan to reduce finance charges on the loan doesn't really affect the cost-of-living.  Also not sure how high the cost-of-living is if your mortgage is just 1.25x your annual income, unless of course you've bought a shack in San Francisco...

            A $300 cash flow per month is not terrific.  Is that assuming no significant expenses come up, or is that without even considering that?  Is that including tax deductions for mortgage interest and operating expenses (tax should still be deductible on rental properties, I think...?) You're not even putting particularly much toward principal each month on a 30-year note.  It would be lousy to take the loss, I'm not sure this is a great decision either way.  Fortunately your income and ability to save should provide a risk cushion for that.

            But yes, ultimately, it comes down to your risk tolerance with what non-tax-advantaged money you would or wouldn't put into the market.  Might just do both, really, like 25-50% of investable funds toward the house, if you like.  You don't have to go all-out one way or another.


            • #7