Author Topic: Should I Pay Off This Rental Property  (Read 1575 times)

sedura

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Should I Pay Off This Rental Property
« on: March 11, 2014, 09:09:27 PM »
My mom and I own two rental properties together. There are 5 years left on a 15 year loan on one of them, and the other is paid off. The balance is $49k at 5.875%. I have about that much money sitting in a checking account not doing anything for me. I was planning on putting it in the stock market, but it being at an all time high makes me hesitant to dump such a large amount in at once. I'm thinking I could pay off the property now and take the $921/month payment and make monthly contributions to a taxable Vanguard account.

Can someone help me do the math? My mom pays the taxes on the rental income, but I think she makes so little money that she doesn't really pay any in taxes. Her rental income is about 32,400. She gets a mortgage interest deduction for 2013 of about $3200. Her taxes are $3500/year for the two properties. Her insurance and HOA dues are about $2000 year. There are usually some miscellaneous expenses of another 5k/year. I'm not sure how much she gets in depreciation, but she paid 160k for one property and $170k for the other, and that was ten years ago. If I would be taking away a tax benefit for her, then I don't want to pay off the loan, but if I'm not, would it be a good idea?

She just retired from her job, and she is 58 years old. She gets a VA death benefit from my dad's passing of about 1200/month that is not taxed. She will probably go ahead and collect SS benefits when she's 62.

Thanks for any insight you can offer!

MDM

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Re: Should I Pay Off This Rental Property
« Reply #1 on: March 11, 2014, 11:27:30 PM »
Whose name is on the mortgage?  Careful of the gift tax if you pay it "for" your mom.

As it is tax season anyway, the easiest way to check the effect of no mortgage interest deduction is to change the amount on the 2013 return and see what happens.  And remember it's the total paid to "Uncle Sam plus the bank" that matters.

She should check various starting years for SS benefits before defaulting to "as soon as possible."  Don't know what will be best for her but the choice should be made with full knowledge of the alternatives.

My own "gut feel" on this generic question (pay off vs. invest) is
- if the interest rate is <3%, invest
- if the interest rate is >6%, pay if off
- in between...it depends what I had for breakfast. 
5.875% is certainly close to 6% so I'd lean toward the payoff.  But first, check the gift tax and income tax implications.

sedura

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Re: Should I Pay Off This Rental Property
« Reply #2 on: March 12, 2014, 09:08:25 AM »
The mortgage is in my mom's name, but I collect rent for her and pay the monthly payment.  I also keep all the profits from the houses, and both of our names are on the title.

If it were up to me, she would not collect her SS at 62, but my dad died at 61, so she thinks if she doesn't collect ASAP, she will never collect.  I don't think can be convinced otherwise, even though she's in good health. *sigh*