Is it better to be 100% debt free or to carry a property loan for the tax writeoff?

If you can get the tax write-off from itemizing your deductions, you would be better off keeping a home loan.

But you don’t get back in refunds as you can make in investments. An old rule for investing money, don’t do it just for a tax refund, do to make money.

I agree with @Tropical_Willie on this. A tax write-off is “nice”, but you shouldn’t have “a tax tail wagging the investment dog”. In other words, a tax write-off, useful as it is, does not recover the interest paid. If you’re not paying the interest, then you’re free to invest that money in other, more productive ways. If your tax bite is higher because of that, then so be it – your income will be higher then, too.

Well, which is cheaper for you? The income taxes you don’t pay or the debt you don’t pay? It could make sense.

We paid off our house 5 years ago, and wondered about this. Conventional wisdom was to keep a loan as a write-off. We decided to own the house free and clear, and that worked well for us. Now, we have a loan on the house again, which helped us buy another house.
The write off is for money you are paying someone else. Why not just keep the money instead?

Your tax bracket is probably 25 to 33 percent. You’re paying out a buck to get back a quarter or a third of a buck. Sound like a good deal?

I did the math, and for me paying my mortgage of was better, since we are in a time of very little interest being earned, and I did not have a lot of money in the market.

Pretty much it goes like this, it is better to pay a mortgage than rent, because you get the tax write off. If you pay $1,000 rent, or $1,000 mortgage per month, with the tax write of you might be paying only $900 at the end of the year. BUT, mortgage compared to no payment, owning the home outright is a different calculation.

What you can do is look at your taxes and see how much they would be if you did not have the mortgage interest to write off. See how much more you would owe. Then look at if you take the money out of the bank to pay off the mortgage, how much interest you lose per year. Remember your interest is taxed also. It’s not that big of a math problem if you look at a tax return you have already prepared and just change the one number.

We need a rental writeoff. Us renters get fcuked.

I hate the idea that you can’t NOT pay taxes on money unless you give it away. If you have a home loan, you only get to not pay taxes on the money you give to the bank as interest. It would make more sense to put the money in a 401K, but then you have to pay taxes on it when you take it out. Grrr!

Paying interest is never a good idea – whatever the financial advisors say.

interesting range of views. If you buy instead of renting, you also get an increase in equity every time you make a payment. Rent is money down the drain. As far as tax deductions, you look at return on investment. The interest portion of mortgage payments return your marginal tax rate—25 or 33 percent, perhaps. I don’t know of any equity investment that does that so predictably.

The cost of the loan is whatever your mortgage rate is less the tax advantage. Then your house also might increase in value. That’s the real investment. You compare the rate of return on the house (less all fees), compared to the rate of return on another investment that you borrow money for to decide which is the best place to use money.

So you ask yourself, will I earn more gains if I spend my money on a house, or spend my money on other investments. The tax advantage probably doesn’t play a big role in it, except looks nice to most people.

Then, they say that the house really isn’t about investment. It’s about having a place to love. So, for me, it was better to spend the money on the interest in order to free up money to invest in the market. Interest cost me 5%, but I could earn 8% in the market. If my loan cost me 8%, and I was only getting 5% in the market, then I’d be busting my butt to pay off the mortgage.

I’m not sure if you’re being facetious, @bolwerk, or if you really think that there should be a “rent payer’s deduction” from income tax.

The intent of the mortgage interest write-off is to encourage home-ownership among taxpayers, because that spurs construction, real estate sales and all of the ancillary industries associated with both of those drivers. (That’s similar to the way that Cash for Clunkers spurred – at least to some degree – new car production and sales when they were perceived to be stagnant.) In addition to the purely economic benefits, there’s a perception that homeowners, with more of an ownership stake in their neighborhoods, make “better” citizens. Certainly “more stable”, anyway, since it’s more problematic to move frequently.

Why would the government want to promote home rentals and short-term tenancy?

Personally, although the mortgage interest deduction has admittedly been one of the government’s real successes in the creation of its Byzantine tax code, I’d give it up – even though I benefit from it as well – if we eliminated all “inducements” that are contained in the tax code. Taxes should be used for raising revenue to fund the government only, I think, and should not be used as inducements to make certain social and economic changes in the population that don’t make sense on their own merits.

Well, I am for a flat tax. That would close all loopholes and stop all special-interest tax benefits, and stop encouraging families to have more kids than society can support.

@Skaggfacemutt I don’t know anyone who has had more kids as a tax write-off.
I do like the idea of a flat-tax, but that isn’t going to happen any time soon. In the mean time, having your house paid off can be a wonderful thing.
One thing to worry about, though, is that once the house is paid off, you no longer will have an impound account taking care of your insurance and property taxes.

@WasCy: Yes, if there should be a mortgage deduction, there really should at least be a comparable rental deduction. Renting is more stable than being saddled with a mortgage for many people, and even when it’s not renters are often renters because they can’t afford better. Forcing renters to indirectly subsidize “homeowners” by giving the latter special breaks is absurd.* And I don’t see much merit in encouraging “home-ownership,” or raping forests and meadows to build the shoddy suburban future ghettos that term usually euphemistically refers to, especially given the environmental and social costs of the enterprise. It would be better to spend tax money, and put tax subsidies if necessary, towards improving what already exists. There’s plenty of potential work for the construction industry fixing age-worn infrastructure.

* And, of course, if owning a house is meritorious, it would be prudent to help renters save for a down-payment anyway.

The tax write off is not worth keeping a mortgage for most people. There are much better ways to manage investments, so If possible, I would pay off the mortgage.

Everyone’s circumstances are different. You don’t have to be rich try to minimise the tax you pay though and to maximise the money your money can earn. Get some individual advice on your particular circumstances. Ask people you know are good money managers if they have a financial adviser. There are some shonks out there. If you find the right one though, it is worth the investment.

I don’t know if they still have it but there used to be a renters refund in California.

This is the first year that the wife and I have taken the standard deduction. We did this, after calculating that we did not have enough deductions to itemize, as in years past.

We, I am proud to say, are debt-free. Everything we own is paid for. We were able to decuct our property taxes and this lead to a better refund for us.

Everyones tax situation is different.

After seeing what happened with the banking industry, my husband and I decided we don’t want to give the banks any more interest money even if it increases our tax burden. We are working hard at becoming debt free.
My daughter and her husband have gone into crack mode with the Dave Ramsey program. They refinanced their house for 15 years and paid off their credit card.
They won’t even have a mortgage by the time they’re 45!

One disgusting truth is somepeople like to have a big mortgage, so if smething severe happens in the market, like the last 5 years, if you walk away from your house you only lose your deposit and what you have paid in, which for many was much less then those who had paid off their houses. For instance, let’s say someone bought a condo for $280k, put down $56k and now the place is worth $150k (actually valid numbers in parts of FL). The owner actually only lost $56k and some other expenses and some damage to his credit, rather than $130k if he had owned it cash.

This is why I was really against bailing out homeowners with atupid loans, because the people who have dne the responsible thing get nothing, and the irresponsible get help. I am all for renogotiating the loan, or working with the lenderfor a new payment schedule, but that is something else.

@JLeslie If you mean they declare bankruptcy, and are absolved of the debt, keep in mind that they have ruined their ability to take out any additional loans, or if they are given credit it is at the highest rate possible. They find they can’t get a loan on a car or another house, or furniture or anything else, without paying extremely high interest rates.

@YARNLADY No, I did not mean bankruptcy. I think a short sale brings your credit down 50 points more or less, foreclosure more, not sure exactly how much. They both make it pretty hard to get loans for a while to your point.

With a so-called short sale, the seller is obligated to pay taxes on the forgiven portion of the debt as the IRS considers it the same as income. It is a very bad deal for the debtor.

@YARNLADY Yes, that was the law regarding taxes, but I think it was changed. I think also technically the mortgage company could come after the money lost, but they never do from what I understand.

I found this regarding the taxes. It seems if it is a primary residence people are likely in the clear on the tax obligation.

@JLeslie Thanks for the link.

@YARNLADY Sure.

It is true that if you pay off your house, you are taking all the risk for your house, but does that really mean that you want to have a house payment for the rest of your life? Yes, your house could be washed away in a flood or demolished in an earthquake, and if the insurance won’t pay for it, then you are SOL, but at what point do you want to stop paying for your house?

@JLeslie, They can’t come after the difference in California, biut they can (and DO) in Nevada. It just depends on the state.

@Judi But according to my link, there are exceptions for primary housing, unless I am misunderstanding? Do you mean state taxes? When all the housing bust first started, was when I was winding down my real estate business, because I moved out of state. I kind of am on the outskirts of all of this short sale, foreclosure thing. What I had remembered was the person was responsible for the difference, but that there was legislation out there to protect the person upside down in is mortgage. I was ot sure what happened with the legislation, which is why I looked up the link.

I’m interested to know if it is different than how I understand to be now, because I have some family members by marriage who have sold under short sale. In fact, as I write this I realize their properties were investments, so they don’t even qualify under the link I provided. I guess they can claim the loss on the property, but then they have to pay the taxes on the gain of the loan?? I’m confused.

I wasn’t talking about the taxes, I was talking about the mortgage companies. I know that there IS a federal exception for the difference in a short sale on a primary residence, but I’m not sure how long you have to live there to get it. Sorry for the confusion. (and the fat iphone fingers.)

@Judi Got it. Interesting. There was a lot of investment property being purchased to flip in Nevada. So, they are actually collecting the difference? On foreclosures and short sales?

They are trying. My friends who were high end builders are loosing everything :-(

@judi But, don’t you think people should have to pay their debts? A lot of builders were mortgaging to the hilt, thought they could not lose, were making HUGE amounts of profit on homes. Where is some of that profit they were making to pay of a bad investment? We had a lot of builders go bankrupt here, did they spend every penny they had made?

@JLeslie Pay their debt yes, but we had one contractor in our area that was paying $23,000 per month for loans on property and semi-built houses. Just do the math he went from two to five house a month being sold; to one every other month for the last 19 months.
His money (profit) paid off the “mortgage” payments .

@Tropical_Willie He overexpanded. This happens in business all of the time. Starbucks recently had to close a bunch of locations, I would guess because they had overexpended. If he had been building onlybwhat he couldafford to lose, he would not be in that situation. i know successful businessmen take risks, but maybe he took too big of a risk chasing the money.

@JLeslie He was selling at that rate for 8 years, that’s not over expanding. Starbust ( yes I spelled it wrong ) it was lack of demographics and poor planning. Three Starbucks within one mile !

You are not self-employeed that is easy to see.

@Tropical_Willie I was self employed for a while. Saved up lots of money in case I hit difficult times. Paid off everything so we don’t play a big money float game. How much was he making for those eight years? And, how much was he saving? He maybe could have speculated less. Waited to build when he already had a buyer, and let the buyer get the loans. Anyway, I have no idea how henran his business, maybe he did everything right, and the economy and real estate just simply sucks right now. But, I saw a lot of builders make hand over fist, lived the high life, and then defaulted on their mortgages, or declared bankruptcy. I feel badly for anyone who loses there business or falls on diffocult economic times, goodness know it can happen to anyone, but too many people got a free ride with this mortgage thing in my opinion. If I sell my house I lose all of the money lost in price, because I own it outright. The couple down the street lost the $70k they put in, and the bank took the rest of the hit. Her personal hit is much less than mine, because she took on an unrealistic mortgage. Oh, and she and her husband are mortgage brokers.

@JLeslie; it looks like they WILL pay their debts. They are in their 60’s and all their retirement savings will be used to pay it. They built one huge house at a time. They never could have imagined that a 6million dollar house would become worth one million overnight. They had one house on the market and had begun building the next one. A lot of people got caught up in the bubble frenzy. People who were smart enough to know better, but who were convinced that the values were real.

@Judi That’s different. One house at a time, is not what I was talking about with @Tropical_Willie, which is why I asked. I do have empathy for anyone who lost their business who had always conducted business reasonably, and prudently. Did the prices really go from $6million to $1million out there? We have seen 70% decrease in parts of Florida, but not that much decrease (and those really large decreases are mostly on condos). I wonder how much was profit if they had sold for $6million? I know a cookie cutter builder in FL was making about $50k per house on $400k houses.

This house was rented and almost sold to a major celebrity that everyone knows. (I’ll PM you her name.)
It really did go down that much in value in Vegas. It’s a beautiful 10k squarefoot golfcourse home with a theater, wine cellar and elevator. There was a huge market for these homes a couple of years ago. The lot they had started finally short sold with a $600,000 deficit. The bank is coming after them for the difference. The loans were short term construction loans.
The other house is in the process of foreclosure. These people personally live quite modestly. You would never know that half the decorations in that house came from homegoods. Noone could have expected the market would take such a huge hit.