Any disadvantage to paying off a rental property?

[tigerdad14]

<p>dstark,</p>

<p>One thing I’m not clear is why do you need mortgage interest deduction for your rental property. Isn’t the mortgage interest part of your operating cost so it should be deducted from your rent (revenue)?</p>

[notrichenough]

<p>dstark - post 12 refers to the ability to deduct passive real estate losses from your income. You can deduct up to $25K in losses from your AGI. However the deduction gets phased out starting at $100K, and at $150K it is gone. You fill out the nasty form 8582 - Passive Activity Loss Limitations.</p>

<p>In your example, you break even, that is you have zero loss. So you are not affected by the passive loss limitation.</p>

<p>You can not claim depreciation, but when you dispose of the property you have to count all depreciation whether claimed or not. So there is no benefit to not claiming it.</p>

<p>The difference is that schedule E uses a 27.5 year straight line schedule, and for AMT you use a 40 year SL schedule. That’s why the deduction is lower for AMT (technically, you add back in the difference on form 6251).</p>

[stevensmama]

<p>To answer some of your questions:</p>

<p>

Stevensmama, are you going to have any difficulty paying off the new loan? Is your rental property hard to rent? Hard to sell?

No problem paying off the new loan. DH and I are both retired with defined-benefit pensions, so we don’t have to worry about losing our jobs. We have a very good property manager and haven’t had a problem finding tenants.

Are you going to switch your 30 year residential loan with 28 years remaining to a 20 year residential loan?

Why not consider a 20 yr, or even 15 yr fixed on the primary residence?

The quotes I received are for 30 year and 25 year VA loans, both at 3.25%. I’ve asked for a quote on a 20 year loan, but I think the monthly payment on a 15 year loan would be more than I want to pay.

A balance of $218K on a house worth $250K leaves you only 13% equity left in your house, so I would say equity is a problem. I don’t know much about VA loans, will they let you take out that much equity?

According to the VA Lender’s Handbook ([VA</a> Pamphlet 26-7](<a href=“404 - Page Not Found - Veterans Benefits Administration”>Lenders Handbook - VA Pamphlet 26-7 - Web Automated Reference Material System)), for “cash-out” refinancing loans, allowable fees and charges and discount points may be paid from cash proceeds of the loan, as long as total loan proceeds do not exceed 90 percent of the reasonable value of the property.

The deduction can be phased out for a rental property if your income is too high - it starts phasing out when your AGI hits 100K and is gone by $150K, except under very stringent circumstances.

AGI is under $100K.

I would actually go for a 15 or 20 year on the rental, you will be able to get a rate into the mid- to upper 2’s. TD Bank is one place that will give the same rate for a rental as your house, and they don’t charge points.

I’ll check out TD Bank–thanks!</p>

[stevensmama]

<p>Another consideration is whether we are taking any legal risks having no mortgage on the rental house. DH is worried that we could lose the house if we’re sued, especially under Pennsylvania’s filial responsibility law. We have $300,000 personal liability insurance in case somebody gets hurt and sues, but that won’t help if DH’s folks or my mom end up in long-term care and run out of money. We could get stuck paying their bills because none of them have LTC insurance, and an investment property with no mortgage might be a juicy target.</p>

[notrichenough]

<p>^ I personally do not consider $300K in liability to be enough if you own rental property. I have a $2 million umbrella, it is not that expensive.</p>

<p>Not sure that splitting the mortgages over two properties makes you less of a target than having one with a large mortgage, and one free and clear. If you did get sued they would look at your income and the sum of all your assets when assessing whether you can pay.</p>

[intparent]

<p>What state is the property in? Assuming PA, which is where your id is located, then it is not a non-recourse state. If you were in a non-recourse state, then I would tell you a story about being REALLY sorry about paying off a mortgage… but that probably is not PA.</p>

[Classof2015]

<p>So much of conventional wisdom is based on when rates were higher than they are now. Even Suze Orman keeps saying 'if you make an extra payment on a 30 year fixed, it’ll be paid off in 22 years." If you do the math, you’ll figure out that her prepayment scenario assumes an interest rate close to 9%. </p>

<p>What I’m saying is the deduction on a mortgage when rates are at an all time low is minimal, at best. But it is correct to say that if you can earn more than what you’re paying in interest, keep the mortgage.</p>

<p>Plus the mortgage broker who suggested doing a cash out refi on your primary may be assuming you can deduct all the increased interest, which may or may not be the case. Check with your accountant.</p>

[notrichenough]

<p>

But it is correct to say that if you can earn more than what you’re paying in interest, keep the mortgage.

This doesn’t apply in a refi situation. They aren’t paying down a mortgage with money in the bank, the total owed after the refi will be the same.</p>

<p>In the OP’s case, refinancing $95K from 5.375% with 21 years left, to a 15 year 2.875%, will raise the payment about $21/month, while shaving 6 years off the mortgage, which will save them over $40,000. Seems like a pretty good idea to me. (Assuming you can get that rate with such a low amount borrowed).</p>

[dstark]

<p>Tigerdad14, I was asking a question based on post 12. I wasn’t giving an answer on mortgage deductility. </p>

<p>Notrichenough answered my question.</p>