I Like Paying My Taxes (You Might, Too, After Reading This!)

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Last week I wrote about how I paid off my first rental property.  I was extremely excited to pay off my rental and I paid it off just a little more than three years after I purchased it.  I was surprised how many people wondered if paying off the rental property was a mistake because I would lose the tax benefits of a mortgage payment.

I understand people who want to take advantage of any tax benefit they can, but sometimes I wonder if people lose site of the ultimate goal in order to get a tax break.  The ultimate goal in my mind is making and keeping as much money as possible, not paying as little taxes as possible.  If I make no money then I am not going to pay any taxes, but that definitely is not my goal!

Related: How to Save Taxes and Avoid the Five Deadliest Retirement Killers

Are people really afraid to make a lot of money because they will pay more in taxes?

I made a comment about this on another blog last week and was blown away by the response.  I mentioned that a career as a real estate agent can lead to making a lot of money.  The commenter said they weren’t interested in making big money, because they would have to pay too many taxes.  I could not comprehend this thinking because either the fear of taxes had blinded this person to the ultimate goal or they were using taxes as an excuse not to try to make it big.

The realities of paying taxes

My theory regarding paying taxes is  that I want to maximize the amount of money I put in my pocket.  I consider what goes in my pocket as the profit I make either through investing, business or working minus the money I pay in taxes.  In order to maximize that figure I have to make a lot of money through work, business and investing.  I can also try to minimize the amount of taxes I pay, but in the big picture paying a lot of taxes means I am making a lot of money.  The more taxes I pay the more money I am making and the more money I make, the better!

Looking at my paid off rental as an example

Now, I am no tax expert, but I will do my very best not to screw up this analysis.  If I am way off base, please let me know in the comments.  Let’s assume my principal and interest payment on my rental was $400 a month.  At the start of the loan about $300 would be interest and about $90 would be principal on the loan.  Assuming all of the payment would be tax-deductible (I’m not even sure if this is the case, I really should know more about taxes before writing a tax article).  Lets assume I am in the top tax bracket and pay 35% taxes.  Assuming all of the $400 is tax deductible and my tax rate is 35% that equals a tax savings of $140 a month.

When I paid off that property I gained $400 a month in cash flow that I no longer have to pay to the bank.  A simple calculation leads me to the conclusion that $400 minus $140 in taxes equals $260 more that goes into my pocket.

Related: Capital Growth,Cash Flow, Taxes And Timing: Planning for Your Retirement the Smart Way

Looking at making big money and paying big taxes

Looking at another scenario; Let’s pretend someone is making big money, is it worth it due to the taxes they will pay?  I’ll use $500,000 as an example of making big money.  Now our tax system has a scale for what percentage each person pays.  The less you make the less percentage in taxes you pay.  Those percentages don’t change for people who make a lot of money until they make over those amounts.  Assuming someone who makes $25,000 a year pays 15 percent taxes, someone who makes $500,000 a year also pays 15 percent taxes on the first $15,000 they make.  Even though a $500,000 earner may pay the top tax rate of 35% they won’t pay that rate on all their money just the money made over that maximum rate threshold.

Even if the $500,000 earner pays 35% on the entire $500,000, they would pay $175,000 in taxes.  That leaves $325,000 in tax-free money in your pocket.  Let me think about it, do I want $325,000 but I have to pay a hell of a lot of taxes or do I want to make $50,000 a year because people pay too much taxes when they make a lot of money?   It’s an easy decision for me.  As a bonus, I feel good about trying to help our government pay down the national debt or build schools for our children or maintain the roads I drive on so much with all those taxes.

Conclusion

I am not saying we shouldn’t all try to save as much money on taxes as we can.  But I don’t think it is wise to sacrifice profit or making more money in the name of saving money on taxes.  When I see a huge tax bill I feel awesome, because I know the reason the bill is so high is I made a lot of money, much more money than the tax bill.

I am really looking forward to having the tax experts chime in and tell me how horribly I butchered these scenarios!

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About Author

Mark is Real Estate Broker and investor in Greeley, Colorado. Mark invests in long-term SFR rental homes and also does 8-15 fix and flips a year. Mark started a blog this year that focuses on investing in long term single family rentals.

66 Comments

  1. Just from a quick research, if Taxable Income Is: Over $457,600, The Tax Is:$127,962.50 plus 39.6% of the excess over $457,600 for Married Individuals Filing Joint Returns. So, you’re not that far off, but it’s even less taxes than you calculated.

    I always thought that getting a tax break from mortgage is overrated, the actual “break” numbers never impressed me. I can get all that money back if I don’t need to pay the interest.

  2. The principle portion is not tax deductible, just the interest but I think you nailed the rest. I think this mentality spreads across all citizens. I have heard a number of folks, when talking about their personal finances say that they are keeping there mortgage of say $20,000 remaining eventhough they have enough cash plus an emergency fund in the bank so they can get the tax writeoff. They will even emphasize this with, especially since the kids moved out and we lost that credit. Many times in cases like this their interest payments are a complete loss because they fall under the standard deduction regardless.

    I do have to say though that I feel better about installing a new door on a rental property compared to my own house because I know the expense on the rental property is tax deductiblewhereas my home improvement is not…

    • Thank you Kyle, I didn’t think principal was deductible, but that still shows how advantageous is to pay it off strictly from a tax standpoint. The deductions would be minuscule. Your right about the repairs on the rentals. I am the same way. If only all my personal home improvements were deductibles!

  3. I completely agree with you, having free and clear properties means a lot more money in ones pocket. Paying an interest rate of 5%, after tax deductions, ends up being only 4%. Taxes are a necessary evil, without proper tax knowledge, you’re penalize for making more.

    If our government quit giving/spending money overseas so much, our taxes could be put to better use. No, I’m not a tax expert, my CPA is. I pay more to him then I do in taxes.

  4. I don’t think there is anything wrong with someone wanting to maximize their legal deductions in order to accelerate their investment plan. For example, unlike you, I cannot afford to purchase properties without using my cash flow; therefore, making sure I have as much cash flow in my bank account every year as possible is key to my strategy. The mortgage interest deduction helps me achieve this goal by reducing the taxes I have to pay.

    Your situation, of course, is different. You have the cash to put down on your purchases outright. You also are in the situation of having too many mortgages to get fixed 30 year financing, therefore you must snowball your cash flow and pay off mortgages before their ARM’s are due. In your situation, doing so makes perfect sense, and the interest deduction is really irrelevant.

    I do agree, however, that no one should avoid making money just to avoid taxes. That is short-sighted, detrimental to one’s financial independence, and just, well, crazy!!

    • Hi Sharon, I completely agree with you. I am only talking about the tax advantages of keeping a mortgage, not the other other advantages. If I were just starting out and needed to Ave every dime (like I did when I started out) I would save ash flow and not pay off mortgages. Strictly from a tax standpoint it doesn’t make sense to leave a mortgage in place, but there are many other reasons to leave a mortgage in place like you said.

  5. Makes no sense having a mortgage of a 250k home and pay 7 to 10k in intesrest each year and not pay it off faster because you will save $500 a year.. makes no sense. This idea of having a tax deductions are an excuse for those people who cant pay extra on the mortgage, wanna be’s, those are the people that dont end up rich, instead have a car thats worth 1/3 of their home… etc.. pay the banks as fast as you can, be debt free and forget about saving $500 to 1000 dollars from taxes when you are making the banks richer 5x than what you are saving. I have 2 more years to pay off my home.. my goal is to pay the house in 3.5 years since i bought it a year ago.

    • Unless you can reinvest this money and make more than you pay banks in interest. If your interest is only 2.785%/annually on a 30year loan and you can make 24%/year by buying and renting, there is more sense in investing that extra money.

    • This is a website for investors, not homeowners. Apples to oranges. And you are making a lot of assumptions about people based on this one strategy. I’m sure there’s plenty of rich people out there that choose not to pay off their mortgages. Getting rich is not a one size fits all proposition.

    • That’s awesome Andy! I do feel there are some instances when people want to grow very fast that it might make sense not to pay off debt early. Using taxes as the reason makes no sense like you said.

  6. Mark, this is an awesome article. I cannot understand the misconception that huge tax bills are somehow bad. I’ll take the huge income that causes those huge tax bills any day. While I am sure there is some “sweet spot” where earning a bit too much really costs you money, but I have not got there yet.

    • Thanks Doug! I don’t think you can ever earn too much, unless it is taking too much time and hurting relationships, etc. The more you earn the more money you have to hire professionals who can save you taxes. Plus hiring those pros is usually tax deductible as well!

  7. David Laplante on

    I am thinking the same! Yet everyone from other investors to my CPA are telling me I should keep my rentals at maximum mortgage.

    I just don’t get it! Why would I want to NOT have money just for the sake of NOT paying taxes? Furthermore, I’m still paying taxes on the capital portion of all mortgage payments when I don’t even have the money: I gave it all to the bank!

    On the other side, if I pay off the mortgage, then instead of putting the money in the bank’s hands, I keep it! I’m still paying taxes on that, but at least now, I have the money!

    I’m still very very mew at all this (started investing 2.5 years ago) and I’m not yet in the position to renew my mortgage at which point I would have the option (or not) to get money out of the equity. But I would very much like to understand the math/logic behind that thinking (of NOT repaying the mortgages) before I get there.

    Can anyone point me towards a simple and easy to understand article about that strategy? Perhaps even with some examples? Please enlighten me!

    Anyway, I’m glad to see I’m not the only one thinking I should repay the mortgage. Good article!

    • It’s not about taxes David. Its about a lot of things:

      1. IRR
      2. CCR
      3. Asset protection
      4. Working hard for money vs. money working hard for you.

      It’s about a lot of things, and taxes are in the last place. I may write an article if I have a minute. But, given the chance to listen to your CPA vs. Mark – go with the CPA :)

      Mark – on the service your conclusions make sense – on the surface. There is a lot to this conversion which happens to be under the surface my friend. I respectfully disagree :)

      Perhaps we’ll have another chance to duke it out…

      • Ben, I’m not going to let you off that easy. Your going to have to give a reason for disagreeing. I’m not saying you should always pay off mortgages, that is not my point. My point is that taxes are not the reason you should keep a mortgage,

        • Ben Leybovich

          Mark – I agree; taxes are never the reason I keep a mortgage. There are much more potent reasons I keep a mortgage. In fact, I only pay off mortgages that I am contractually obligated to pay off. The rest of them don’t bother me in the least.

          I mentioned some of the reasons above and going into a more detailed explanation is an article. If you bribe me enough I might write it :)

          As to higher taxes as a function of earning more money, here’s the deal:

          If the money is earned passively, I have no problem with taxes. However, paying more taxes the way you advocate is indicative of w2/1099 income, which goes against everything I believe in. For instance, I am currently working on forming a syndicate with which I hope to do 10 transactions in the next 10 years. It’s true that there will be earned income in the mix, but there will be an awful lot of CF, equity, and tax write-offs as well. This will build income and wealth at the same time, unlike earned income which only builds income, unless you spend the money to pay off mortgages which absolutely kills rate of return relative to every metric known to man…

          Thoughts?

        • Thank you Ben for more details. I agree in a perfect world where one could make as much income as they wanted either through investment or income, it would be more advantageous to earn all your money through investments. But why not maximize them both! My earned income had allowed me to buy more investments in the form of rental properties, which earns me more investment income taxed at a lower rate. It seems silly to ignore earned income or not to try to maximize it because it is taxed at a higher rate. If If i only concentrated on lower taxed income I would make a lot less money and have a lot less money to invest with. Therefore I would be able to create much less lower taxed income.

        • Ben Leybovich

          And this is your winning formula, and it works – for now. You are healthy, and God’s willing you stay healthy. I don’t work for money. I don’t earn money – I create it…this is a huge distinction Mark!

          I am writing a couple of posts on this :) But, the thrust of it is the following:

          There are 24 hours in a day. Every minute you spend earning money, is a minute you did not spend creating money. You realize that Financial Independence is impossibility via earned income, which is why you are out there spending it to buy assets – right? Of course I am right – this is exactly what you are doing. All I do is skip the step of earning and go on to acquiring assets; that’s the only difference.

          This is why I pay very little taxes, since most taxes you pay are due to the high income that you earn, which I do not. So, it’s not that I don’t like to pay taxes, but rather that high taxes are indicative of the wrong kind of income… :)

        • Hi, Ben, sorry for interfering. You once told me that I should quit my job or earned income and be a full time investor, like you are, if I want to do it seriously (something like that, may be not the same exact words).

          The thing is, I will never quit my job on my own, I don’t like to put all my eggs in the same basket. My goal is not to limit my taxes, my goal is to take risks, but be on a safe side (which is individual, everyone feels safe at different risk levels). If I were single with no kids, my “safe” side would’ve been different. But now I feel safer when I have a great insurance and benefits, when my employer triples my contributions. And I know I can do this on my own, but I wouldn’t have done this, if I were an independent entrepreneur.

          And another thing, the more taxes I need to pay, the more I’ll be willing to donate to local businesses/hospitals/schools as a part of tax deductible charities, which will give me tons of advantages over others (you get the best deals at those businesses, or the best rooms in the hospitals, you get advertisement and recognition for your own business and your money goes where you want it to go).

        • Ben, I have 9 people on my team. The majority of money I make is made by other people who work for me. I get home at 5 every day or earlier, don’t work weekends and golf once or twice a week.
          By earning (other people do most of the work) and using income I create as you call it. I can create much more income, much quicker and have a lot left over to use to enjoy myself with my family on vacations, in our home, etc. Plus I have more money I can help others with as well.

          Why limit yourself to just one form of income, when there is so much more out there? Your product would be a form of earned income correct?

      • I wanted to jump in and immediately plug the http://www.investfourmore.com website, but wanted to give Mark the professional courtesy.

        There is a distinct advantage to reducing your DTI ratio by paying off a house then using the equity to purchase new properties. We will see this advantage a lot for the next couple of years due to the SAFE act and Dodd/Frank. Lending will become more restrictive in the near term, particularly for investors. We have to think about tomorrow.

  8. Mark Ferguson, I think paying off rental property can be a good thing depending on your personal goals. It is a noteworthy accomplishment to do so. When it comes to taxes though, it may not be the best choice. I would like to explain a quick example I use quite often when asked, “I have enough to buy a 4plex outright. Should I buy one with cash or use a loan?”

    EXAMPLE SCENARIO (somewhat realistic #’s for my area on the Kenai Peninsula, Alaska):
    *Person has $200k (maybe a Self Directed account or sold something)
    *4plexes are $200k on average
    *Banks require 75% LTV
    *$800/unit w/very low vacancy 0-5% (we will not use any)
    *PITI of $150k @ 4.5% for 30 yrs is about $1000
    *All other monthly costs are about $700 (Only includes common monthly costs)

    CHOICE 1: I BUY ONE 4PLEX FOR $200K
    Monthly Profit = $2500
    Yearly Profit = $30,000
    Yearly Depreciation = $7,273
    Yearly Interest Deduction = $0
    Taxable Income = $22,727 (75.76% of cashflow is taxed)

    CHOICE 2: I BUY FOUR 4PLEXES WITH 25% DOWN EACH (Total $200k)
    Monthly Profit = $6,000 ($1,500/building which is about what I make)
    Yearly Profit = $72,000
    Yearly Depreciation = $29,092 ($7273×4)
    Yearly Interest Deduction = $26,800 (1st interest of $6,700/building)
    Taxable Income = $16,108 (22.37% of cashflow is taxed)

    Mark, you wrote, “The more taxes I pay the more money I am making and the more money I make, the better!” Which is true when you thing about earned income. My goal is to produce monthly cashflow, minimized earned income, and maximize passive income. By using CHOICE 2, a person can pay less taxes, but make more money by using mortgage interest and depreciation to his/her advantage. So, I say, “The LESS taxes I pay the more money I KEEP and the more money I KEEP, the better!”

    • Thanks for the analysis Tyson. I actually agree with you that buying properties with leverage is much more advantageous than buying with cash. I do the same thing. In your example you are talking about purchasing properties not paying off mortgages. I also agree it may not be the best move to pay off mortgages depending on your situation and goals, but my analysis is strictly based on the tax side.

      On the tax side you are going to make more money earning extra income without a mortgage payment than you are going to make having a mortgage payment with tax deductions.

      • Mark wrote: “The ultimate goal in my mind is making and keeping as much money as possible”. This is consistent with scenario 2 above. In that choice, you simultaneously make more money and keep more money.

        I think the article was trying to address something different: a more simple minded strategy (“Never pay off the property, so that you can maintain the tax advantage of interest deduction”). This sometimes results in actually making less money. For example, if the person doesn’t put the capital they would have used to pay off the mortgage to work for them at a yield better than the tax savings they could get. Using your example, it would be a choice #3, where they would buy only one property using $50K, but keep the other $150K in the bank in a low yield account.

        In this case choice 3 is worse than choice 1 (in certain aspects, better in others, for example liquidity… although that’s debatable). Choice 2 is better (in certain aspects, worse in others, for example risk… although, again that’s debatable)

        Gray is the color of life, not so much just black and white…

        Luis

      • Mark you are most definitely correct if you only talk about having one property. With one isolated rental property and one mortgage I cannot argue with the fact that you will keep more money by paying off the property. But if your goal is to make more money why wouldn’t it be just as viable to save the same amount of extra dollars to use in a second investment of some kind? The cash on cash return the paid off property produces will be very small. In my world (AKA South Central Alaska), if I am patient, I find properties in which I consistently receive 15-25% cash on cash returns.

        You have said that your “analysis is strictly based on the tax side.” I think it may be more accurate to say that your analysis is SIMPLY based on the tax side. Discussing the good/bad consequences of paying off rental property is much more complex than just simple taxes. One example is accounting for the rental income you used to pay off the property as money that you have not been able to use for new investments (probably for several years). Leverage and complex taxation must be a part of the conversation if you really “want to maximize the amount of money [you] put in [your] pocket”.

        • Tyson, I totally agree. I wrote a lot of articles and this particular one is only addressing the tax side because I had other people comment about the loss of tax deductions when paying off a property. If we are strictly looking at returns then I would never pay off a property. This is the article I wrote last week that goes much more in-depth on why I paid off this rental.

          My main point is that people shouldn’t be afraid to pay of a property because they will lose tax deductions. Like you said there are many reasons that you should invest that money instead of pay it off.

    • David Laplante on

      Thanks for the examples! I have a question though.

      Here in Quebec, banks require 80% LTV. I was lucky enough that when I started investing in rentals, my own house was fully paid. So when we decided to buy our first rental, we took a 80% mortgage on the rental and took the remining 20% as a refinance on our house. Therefore, my rental is 100% financed.

      Being 100% financed, ALL of my rental income goes into either bills for that rental or on both mortgages payments. So my monthly net is effectively 0$ approx. Yes it’s not costing me a dime to own it and I’m building equity at no cost to me but….. I also have no breathing room when comes the tax time. The government is taxing me on capital reimbursement that was made to both mortgages when in effect, I do not have that money since my cashflow is 0$

      When everyone is saying to keep my rental mortgage, are they saying to keep it at 100% or let it come back down to ~80% and THEN keep it there?

      I just don’t see how I can keep buying more and more properties this way (keeping them all at 100% LTV) and not have any breathing room if something goes wrong. However , letting the mortgages come back down to about 80% LTV, I can see it working. The small positive cashflow that I would have then would be just about perfect according to my newbie calculations.

      This is a great conversation we’re having here! It is THE ONE big question I am not quite fully understanding. I get the feeling that when everyone is saying that I should keep my rentals “fully” financed, they are in fact saying that I should be keeping them at 80% LTV and not at 100% as I have them now. Is that it?

      • David, you are right. When most people speak of fully financed “non-owner occupied” rental property, they mean 75-80% LTV. The first 4plex I purchased was at 10% down in 2006. My cash on cash return was great, but my cashflow was minimal. Since then we have purchased several more properties at 20-25% down because of tightening Bank requirements. At first I was mad that I would be required to put more money down on each property, but I soon learned that it was for the best.

        I do believe investors should keep rental properties leveraged, but there needs to be a balance between equity and debt. Here are some reasons why I like to keep my mortgages close to 75-80% LTV:
        1) More monthly cashflow – the mortgages on my 4plexes only cost about 1/2 my monthly rents. This means I can either have 2 empty or cut my rents in half and still not be negative.
        2) I can still make a 20-25% cash on cash return on initial investment.
        3) It keeps my debt to equity ratio in check so that the bank will give me more mortgages.
        4) I am still able to leverage 4-5 times the money I put into the deal.

        I invest for cashflow. This is my job and if it doesn’t make money every month, I will get into financial trouble. So if I were in your situation, I would definitely pay back down to 80%. As you said, by “letting the mortgages come back down to about 80% LTV, I can see it working.” I think you have given yourself some good advice.

        • Thanks! that makes much more sense now.

          I guess my plan would then be to let it go down and not refinance higher when comes the time in 2.5 years and then i’ll be in a much more confortable position! Thanks for the clarification.

          Your confirmation was the missing piece in my puzzle. Thanks !

  9. Good on you Mark.
    I am not a tax expert but IRS publication 527 http://www.irs.gov/publications/p527/ch01.html
    seems to read (my interpretation possibly) that mortgage interest on rental properties is a direct deduction.
    Am not saying the approach is wrong just passing some possible info along.

    Types of Expenses
    Listed below are the most common rental expenses. (pasted from the IRS site)
    Advertising.
    Auto and travel expenses.
    Cleaning and maintenance.
    Commissions.
    Depreciation.
    Insurance.
    Interest (other).
    Legal and other professional fees.
    Local transportation expenses.
    Management fees.
    Mortgage interest paid to banks, etc.
    Points.
    Rental payments.
    Repairs.
    Taxes.
    Utilities.

    Cheers,
    Last

    • Hi Last, I would agree with that. The deduction would reduce the amount of income on a tax return and the actual saving for that deduction would coincide with whatever tax bracket someone is in I believe. I thought that is what my analysis showed, did you see something else?

  10. Mark,

    I think, as Ben mentioned, that as you have a more complex situation, it is possible to envision multiple scenarios where different strategies make more sense. Most times it is just important to maximize the “area under the curve” of earnings over time (that is, to maximize the accumulation of money over time, as you end up with the most money at the end of your period of time). But there are other variables (such as risk, maximum draw down over time, etc) to consider. These variables result in multiple scenarios arising, and multiple strategies possible, that provide better results when the other aspects are considered. I think that’s Ben’s point.

    However, my experience has taught me that in real life relatively simpler strategies work better than complex ones. So I, for the most part agree with your strategy of paying off early and simplifying vs looking for a perfect, all-maximizing strategy. It just works better in real life, not because one wouldn’t understand the more complex one, but because life variability (markets, business, general economy) gets in the way and it is just not possible to perfectly maximize the returns.

    Keep with your approach… you’ll do just fine. :-)

    • Thank you for the comment!
      I agree that it is not always the best strategy to pay off mortgages as quickly as possible. My only point is that taxes savings is probably one of the last things that should be considered when paying off a mortgage because the increased after tax income is going to be so much more than the tax savings.

  11. Brian Levredge on

    This definitely does not apply to all scenarios and I would say is especially untrue if applied to apartment buildings. As you know, apartment buildings derive their value from the income they generate, which means that as rents go up so does the value of the building. Refinancing ever couple years (as long as the rents support it, and you’re not stripping out too much equity) is actually a great way to give your self a tax free bonus since cash pulled out on a refi is a non taxable event.
    That money can in turn be used to buy additional properties, which will in turn further increase your cash flow over the long run. While I know the point of your article wasn’t to avoid making more money because you would be taxed on it, you made the comparison between a Realtor earning more money and an investor paying down debt on a rental. Those are two completely different scenarios. The Realtor is engaged in an active trader capacity where his or her income is taxed as ordinary. In addition to that, they are also paying FICA (15.3% if self employed) on the first 117k they earn this year. The investor is obviously engaged in a passive business and thus is taxed much differently, paying no FICA on income received. Certainly you can see why someone would rather derive more of their income from passive investments vs making earned income.

    • Hi Brian, thank you for the comment. I agree with much of what you say. I think refinancing is a great way to pull cash out to reinvest and increase returns. In that scenario the main reason to refinance is to get more cash, not because your saving money on taxes.

      Brian, you are right about the two being taxed differently. That actually makes the tax savings from a mortgage payment much less than what I stated in my article, which was my main point. As far as earned income versus investment income the taxes are much less on investment income, but that doesn’t mean you should want both. If you could earn equal amounts from both income sources based on your time then obviously you would work on the less taxed income. In my case I can make much more money for my time spent with earned income than I can investment income. I still use my earned income to by investments.

  12. I work too hard for my money to pay top rates. There it is. Sure it’s always nice to have more money in my pocket to keep, but at some point, it’s not worth the effort. Obama has raised the top federal rate to 39.6%. He’s instituted a net investment income tax of 3.8% on top of the income tax. In Minnesota Dayton has raised our top rate is 9.85%. That’s already 53.25% Social Security takes 12.4%. Medicare starts at 2.9% and then jumps another 0.9% for top earners. I like to work and be productive, but I’m not going to work for 50 cents on the dollar. I don’t take any joy paying extortionate rates to the government so they can give my money to others. I take offense that too many think they can spend or invest my money better than I. I am thankful that we have been able to pay the taxes that we have, but working multiple jobs is not worth the hassle with tax rates anywhere near these. The United States is now only ranked as a ‘Mostly Free’ country and is falling fast. You’re not free when you’ve got to have long drawn out discussions on the implications of tax rates. You’re not free when the gov’t is taking more than 1/2 your income in taxes. “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.” – Thomas Jefferson

    • Thanks for the comment Alan. My thoughts regarding taxes are that they are high, but not nearly as high as they have been historically. I have a pretty good life and I would rather lie it happy than complain about things I can’t control. If your paying the top tax rate then I am guessing you have a pretty good life as well. Starting a revolution because taxes are too high when your login a good life seems a bit extreme to me.

      • I have a great life and I do enjoy it, but this country is headed in the wrong direction. I want my boys to enjoy the freedoms and opportunities that I’ve had. Citizens need to pay attention and hold their elected representatives to account. I’ve contracted with enough government agencies to personally witness gross incompetence and waste. I don’t mind paying user fees and reasonable rates. I don’t like 50+% marginal rates.

        • +1 Alan
          “The problem with socialism is that at some point in time you run out of other peoples money.”

        • I think its a bit extreme too.
          Sometimes people take wrong conclusions and do not look at the facts.
          Freedom also depends on eachothers opinion. Freedom for one can be not paying taxes. Freedom for another is not to have to live scared of thinking everyone has a gun and may go nuts and shot dead people because someone else is eating popcorn…. or nock on the door to ask for help and instead can be shot dead…

          Freedom for others is to be able to go to the doctor everytime he needs health support, instead of dying, live sick and affect his company productivity, or go bankrupt and that bankrupcy ending his freedom because he got unlucky and got seriously sick.

          Freedom is a very subjective subject that some people think is very simple.

          Oh, interesting enough what brought down US several times was not taxes, was the free for all capitalism by big companies that actually have tons of tax breaks :)

          Ironic….

  13. It depends what your plan is. If you do not want to invest anymore, than pay it of, if you want to invest, instead of paying the mortgage, use the tax refund to do more investments.

    My 50 year old sister for example is killing herself to pay the mortgage because she hates paying interest, but does not enjoy life at all. Why not enjoy life a bit, get a small tax refund and take a bit longer to pay the mortgage?

    I do not pay off the mortgages, I keep investing in more properties that will provide me with much more money in the future. I pay 3% interest in investments that give a return of 20%, so, the more debt at 3% I have, the better.

    If you have lots of money and do not want to do anything with it, then why keep the mortgage and waste money on interest even if there is some tax break?

    Filipe

    • Hi Filipe, I agree with you. My point is not to keep a mortgage just for the tax benefits. If you have other reasons to keep it or are investing money instead of paying off the mortgage I think that is fantastic.

    • Alan Mackenthun on

      Since I can’t reply to your reply above starting “I think its a bit extreme too.
      Sometimes people take wrong conclusions and do not look at the facts.
      Freedom also depends on eachothers opinion…” I’ll reply to you here.

      Freedom is not at all subjective. It matters not at all what others think. Freedom and liberty only requires that your individual rights are protected. That you can say what you think, that you can worship your god, that you can keep what you work for and have security in your personal property. If you’re scared because someone else has a gun, that’s your problem and it gives you no right whatsoever to infringe on someone else’s right to protect their person & property. Welfare is in no way freedom. No one has a right to anothers work including healthcare. If you want someone to provide you healthcare, you have to pay for it. If your freedom requires others to give you things then they are your slaves and you’ve stolen their freedom. In fact, every form of wealth transfer necessarily takes from others to give to the perceived needy. That’s not charity – it’s stealing.

      Finally, free market capitalism never has brought down the economy. Imperfect people bring the economy down. People are make mistakes. It’s a core part of what we are and it’s always going to happen. There will always be economic cycles. Socialists would minimize cycles by eliminating the hope of growth so that we get to enjoy one consistent slide to economic collapse. See the Soviet Union and every other place that’s tried it. Free market capitalism allows you to make your own choices, take risks and hopefully build a good life for yourself. That’s what we’re all about here at BiggerPockets.

  14. Great article Mark and exactly what I’m working towards…paying off my rental so I can re-invest that money in even more RE investments.

  15. “It’s an easy decision for me. As a bonus, I feel good about trying to help our government pay down the national debt or build schools for our children or maintain the roads I drive on so much with all those taxes.”

    Really? I have the opposite feeling when I pay taxes. I feel sick. If my tax money was genuinely going to useful governmental causes with low incidences of fraud and abuse and not to lazy people or politicians I would feel much better. I wish I could feel good when I paid taxes!

    • Dan, that was a half joking statement. I wish my tax money was spent better as well. I have learned over the last year to not let anything bother me. I look at all the positives I can and so far it is working out

  16. That’s funny thinking that your taxes are going to help pay off the national debt or help schools. Reality shows a different picture. Government keeps spending YOUR hard earned money while giving back very little to you personally. And they always want more.

    The point is that you may feel good paying the $125,000 in taxes but it’s your hard earned money that is being wasted. They didn’t earn it. You did.

    • Jared, there is waste in the government, there always has been and there always will be. It’s the nature of the beast. I can vote and do my part to try to get the best people in there, but besides that I’m not going to worry and get mad about it. I will look at the positive side to everything.

  17. Great post Mark, amazing how many people don’t understand what a progressive tax structure means yet spout of things like if I work overtime (1.5 times my normal pay) they take too much out in taxes (actual tax increase would only be about 5 to 15% of only the extra .5 of the hourly pay) so I won’t work it. So in a sense they are losing a ton of value by skipping the overtime. So many people actually think that if they all of a sudden go into the next higher tax bracket by even a dollar, all of their income is taxed at the higher rate instead of just that dollar. Too much misinformation out and my dad told me crud.

    Anytime someone is taking a deduction (not a credit) it is a way to recoup only part of wasted money. It makes no sense to spend extra money that you would never normally spend (mortgage interest) to recoup 1/3 of that money that you would never have spent in the first place. That’s a loss or negative deviation. (yes this is generalizing and there are a few exceptions). Love it when I hear owe he just gave all that money to charity for a write off. Like he/she gets all the money back plus more. (of course a few exceptions).

    And of course as stated above, if you can borrow and use that money to make more money than you are losing in interest than its a great move and the ability to deduct anything is icing on the cake.

    • Thank you for the comment Rook. I am glad you understand where I am coming from.

      That is a great point about charity money. Yes, they get a write off, but they still are out 60% of that money or more!

  18. Amazing how many people with you on points you agree with them about.

    Cut and dry, you pay $1 of interest and most people will save between $0.25 and $0.50 depending on your tax rate and state taxes. On its own not a smart economic move.

    Now there are roughly a billion reasons someone would want to have and not pay off a mortgage, but that isn’t what you were arguing.

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