Paying off which mortgage first?

Question

I'm seeing that is pays to actually pay off a mortgage of course. but My question comes from a tax stand point:

If you can pay off a mortgage which one should you pay off first?

Rental that has income coming in? or Your primary residence?

I'm interested in the choice. I've been doing taxes for ever, and thought that if you paid off your rental mortgage your taxes would be increased due to all of the rental income being profit (except for the operating expenses).

If you paid off your primary residence you would expose yourself to the same thing , no mortgage interest, But it would Not be profit. This would escalate you to paying more in taxes.

Of course one would have more cash to buy another rental if your Primary mortgage is paid off and that would be moving from on mortgage to another one. in a sense giving you the ability to have another mortgage with more property.

So I'm thinking if you get rid of your Primary mortgage you should get another rental right away, Any thought?

Gino Barbaro · Answer

@earl hoyoward

Hi Earl

I was taught that your personal life should have as little debt as possible and that your businesses should carry the debt because you will be generating revenue to pay the debt. Rental real estate is a perfect example. The tenants are paying your debt while the property is appreciating and the principle is being reduced.

I think it is all about mindset. I would like to have a clean debt sheet on my personal balance sheet.

Gino

Ho Pham · Answer

I have a similiar situation I need some advice. I currently have a rental that is Free & clear and my primary residence has a mortgage of $149,000 at 4.875% 30/yr fixed. My wife and I are deciding if it would be wise to refinance the rental and pay off our primary residence mortgage. I need to know the pro's and con's. Thanks in advance!

Antonio Esquivel · Answer

I would say if you have several mortgages, pay off the smallest amount. Generally speaking, you free up the most amount of cash-flow for the least amount. And then the 2nd smallest, 3rd etc.

Sean Kruger · Answer

I have been thinking the same thing and would like to hear from others. I think a lot of the question depends on what state you live in and how much you owe on your primary residence. I saw this because in Arizona we have low low property taxes(less than 1% of loan value) and relatively low state income taxes. In AZ if you had a mortgage with less than a $200k balance; the interest, property taxes, and state income tax could be lower than the standard deduction(2015 is $12,600), assuming you are married- unless you give A LOT of money to charity. In this case it's my thought that having a mortgage on your primary residence gives you a $0 tax break because you could just take the standard deduction. On the other hand the interest on a investment property would go against the income down to the last penny of interest paid on the mortgage. With my logic, with the right circumstances it would complete sense to payoff the mortgage on your primary residence. However, by that same logic, it never really makes sense to pay off the rental.

I am hoping someone can chime in on my thoughts and fact check what I am saying. Especially as I have been really thinking about paying down the mortgage on our primary residence.

Sean

I am hoping someone can chime in on my thoughts and fact check what I am saying. Especially as I have been really thinking about paying down the mortgage on our primary residence.

Sean

Earl Howard · Answer

So you would have a stagnant growth and a very good positive cash flow? it sounds like taxes would be greater in the long haul. I'm thinking to grow (may be I didn't get that point across) which one would you pay off first, to buy another property?

Gloria Mirza · Answer

I wouldn't pay off either mortgage since rates are low and that's basically cheap money you can invest. If you have a high rate you might consider a refi. If you're dead set on paying off your mortgage, I would think that the best option is to pay off the mortgage with a higher rate. In terms of tax consequences it's pretty even provided your rentals are producing enough income for you to write off the interest in the current year and not have to carry it forward. From the sound of your post it seems like that is the case.

Paying off which mortgage first?

Paying off which mortgage first?

Most Popular Reply

7 Replies