Tax and mortgage interest question

[Kin Leung]

Hi BP, We currently have 3 properties in the Bay Area, 1 of which is our primary residence. The other 2 are rental properties with enough positive cash flow that we have to pay taxes on the rental income after all the deductions and depreciation. Our primary residence has a loan balance of about $500k and the rental properties have appreciated enough that I'm quite sure have more than $500k equity despite still carrying mortgages on them. My question is if I take $500k out of the 2 rental properties and put the money towards my primary residence, it would probably generate a passive income loss and as a result offset the rental income tax I have to pay. Does that logic make sense? Are there implications I need to be aware of? More specially, if I put the $500k towards the primary residence, would it nullify the investment nature of the use of the money?? Thanks for everyone's input.

[Chris Mason]

Hi @Kin Leung,

I'm not a tax professional, but it sounds to me like all you are doing is moving $500k in mortgage interest write-off from Schedule A to Schedule E.

So really the question is if mortgage interest is any more tax advantaged on Schedule E than Schedule A? Any tax professionals want to chime in? 

There would need to be some compelling tax reason to shift $500k in debt over to higher interest rate loans, I think.

Other than that, there are some philosophical/cultural/preferential reasons why some people just want their primary residence paid off. If it's important to you for non-math reasons to own your primary residence free and clear, go for it & paint your door red!