Pay off mortgages or use interest as tax deduction?

Question

I have 4 mortgages where I am paying approx. $35k per year in interest. This obviously reduces my tax burden. With other deductions, I pay no taxes at all.

I have the funds to pay off these mortgages.  Would it be wise to do so? How can I calculate the 'sweet spot' between the max. amount of interest to owe-v- least taxes to owe?

e.g. Let's  say I pay down the mortgages to only having $20k in interest paid each year.  How would I calculate if my tax burden is $15k or less? The point being, if I have no interest payments, what % of the 35K is likely to just go directly to higher tax payments assuming all other variables are equal?

Thanks

Side note: I am aware of the variable that the opportunity cost of the return I could get on my funds if I used them elsewhere would be lost.

Mary M. · Answer

I never understand these “interest is tax deductible “ comments.

Yes, it *is*, however its not a 1/1 ratio where you pay 1$ in interest and then you pay 1$ less in tax. In actuality it is more along the lines of you pay 1$ in interest and you pay .25-.36 CENTS less in tax (this is just an example - your tax rate will vary)

Basically the interest deduction is a deduction in taxable income. Not a direct credit  to taxes paid.

Joe Villeneuve · Answer

Why are you just looking at comparing your choices based on tax deduction or mortgage paydown/  Your missing the most important part of this.  You're not the one paying the mortgage...paydown or interest.  Your tenant is.  That means, by leaving things as they are now, your tenant is:

1 - Paying down your mortgage and you are getting the benefit of the principal paydown2 - Paying the interest and you are getting the benefit of the tax deductionDon't do your tenant's job for them.  You're not gaining anything, and are actually losing cash flow in the process.

Joe Villeneuve · Answer

1 - You're not saving any interest since you're not the one paying it...your tenant is.

2 - How much is the total amount of principle you are paying off.

3 - When you pay off all your properties, and have 100% equity, you are not eliminating your risk...you just took on all of it.

Mary M. · Answer

@Russell Buxton the only person who can answer this is your CPA. You may not taking i to consideration the depreciation deduction that you take each year etc.

No matter what anyone says interest is money coming out of your pocket. Not your tenants. Why? Because if you did not have the interest payment all that 35k would be  available for other uses (ie in your pocket)

Maybe shoot a text to Your accountant/CPA and have them help

Russell Buxton · Answer

Fellow ’Biggerpocketers’

Thank you for you responses. I work in Singapore and therefore have no personal property mortgage to pay down, but thanks for that suggestion.

The advice given in this thread perfectly answers my question. At present, I am approximately 40 K out of pocket because of the mortgage interest I am paying. as Mary stated, if a pay down all mortgages, my net gain will be 30k but with a 10k tax payment.

Bottom line, assuming I have already met all my real estate goals, I would be adding 30k a year to my passive income with no additional risk if I pay down the debt.

Robert M. · Answer

This is a very complicated topic and tends to be relative to the personal goals of the investor. Dave Ramsey would tell ya all debt is a liability and to pay cash.  Most on this web site will tell ya, Debt that tenants are paying is deductible and good debt. I dont know that I have the answer. What are your goals and why did you invest in real estate? Personally I pay off any and all debt so I can sleep at night and have very little stress, I will get my money back(interest free) over time. If my tenants move, I dont needs to rent the property out ASAP, its paid for. As far as write offs, ive yet to pay taxes on my payed for rental passive income. Its much easier to leverage a paid for property. If the economy tanks, I can easily lower the rent so to keep them full until the economic bounce. You need to ask your self what your goals are and just how big you want to be. Opinions are like *** holes, everyone has one.

Best regards

Robert

Bill B. · Answer

All the rental mortgage interest is 100% deductible but if you have a mortgage on your personal property and don’t have 12/24k (single/married) worth of personal deductions you could pay that mortgage off as it is not tax deductible that case.

Brent Paul · Answer

What are your goals with real estate?  If you aren't in that higher tax bracket it probably won't be worth it.  If you don't plan on buying any more houses it might be worth paying them off though.  Or if you are the type of person that doesn't like debt or worries about a recession than paying them off might make sense.  It could come back to bite you if the property values take a dive and you sink all your money into paying them off.  Takes quite a while to get the money back you put into it.  However one thing you should ask yourself is if the money could be used elsewhere to help grow your portfolio if that is your goal.  In which case I would take that extra money and put a downpayment on a few more houses.

Or as others have suggested pay down your primary home instead.  Which frees up more money.

Carlos Ptriawan · Answer

When you pay off all your properties, and have 100% equity, you are not eliminating your risk...you just took on all of it--> Best answer. What Investor doing is really only pay the initial investment and hope to get out after a certain year.

Pay off mortgages or use interest as tax deduction?

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