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Cash Flow
Old 09-16-2008, 06:12 AM   #1
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Cash Flow

Early retiring at the end of the month and will be getting a lump sum pension payment from a pension plan that was ended in 1995- will be about $140K which we're planning to use to pay down our mortgage a bit. In some ways, this is found money because really didn't expect it to be there when I left the business.

We have an interest only mortgage on our house at 5.62% so the required payment would decrease by about $650 per month if we put this money on that mortgage. We also have a rental house with a $140K mortgage at 6.75%, $1310 P&I payment per month, that we could eliminate so from a cash flow perspective, this seems like the way to go. This load is at a considerably higher rate as well so just seems like it makes more sense.

Understand that our "profit" on the rental house will increase but we've been limited because of our income for the last few years anyway for writing off this profit. We'll be selling the rental house in a few years but the idea of not having to make that payment is tempting? Net is that we don't really seem to be seeing much of a real tax savings from this mortgage interest because of income levels (a good problem to have, LOL) but thought I'd get some other perspectives?

Thanks in advance.
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Old 09-16-2008, 07:16 AM   #2
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Is the 140 net of taxes?
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Old 09-16-2008, 09:21 AM   #3
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Seems to me that Martin could utilize a 1031 exchange and move his equity in the rental unit into a tax-deferred cash flow generator, increasing total revenue.

Re the primary residence, equity is good, unless your intention is to flow with the available cash flow until death, at which point, nothing matters except perhaps heirs.

More detailed information is needed; there aren't enough facts here to develop much of a cash-flow strategy. jim
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Old 09-16-2008, 10:45 AM   #4
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Originally Posted by dex View Post
Is the 140 net of taxes?
Yes, the 140K is after taxes.

Jsutro, not sure I understand how swapping one rental unit for another would help me decide which mortgage to pay down? May not understand the question or comment or I may have misled you to thinking this was a wider question than it is? I was just thinking of the payments we make each month, one for $2640 on our primary residence that would drop to about $2000 if we apply the $140K there but if we pay off the rental unit mortgage, we would no longer have to pay the $1310 payment so to my simple thinking, it's a better approach. We would lose the interest as a deduction either on our house or the rental which would be about $9500 this year on the rental? The rental unit already has positive cash flow each month that is part of our income stream?

Our longer term intention is to keep the rental unit for another 2 or 3 years (hoping for a bit of recovery in the market), then sell both houses and use the equity to move to a less expensive location. We've had the house rented for about 10 years now with only 3 months where it hasn't been occupied and the cash flow let us pay down that mortgage to a level well below where it would be if we didn't pay extra each month, maybe not the smartest use of the money but never really was comfortable thinking I could invest it well enough to do better than the interest we were paying?

Thanks for the feedback so far!
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Old 09-16-2008, 10:49 AM   #5
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I might be sitting on a boat load of cash over the next few years, but it never dawned on me to put a large chunk of that in my primary residence or investment real estate. I'd be hestitant to make any illiquid investment these days, until things bottom out completely.

If you're planning to relocate, I'd consider doing a starker/1031 exchange on the rental that might later be your dream retirement home; selling the primary and getting the 500/250K income tax exemption, and then after the one year lease has expired on the rental (or its been vacant for a while) moving into the starker/exchanged property. I'd take the $140K and put it into Dominion Resources -- that's a pretty safe for a two-three year window -- why wouldn't the dividend stream from Dominion Resource improve your cash flow, while perhaps getting some stock appreciation as well. Dominion has a good DRIP.
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Old 09-16-2008, 12:29 PM   #6
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*I am no CPA*

Based on the OP, I assume that the rental is not in a corporate structure. It is titled in your name?

I haven't run this calculation in a while, but it was usually better to pay down the mortgage on the house you were living in rather than applying it to the rental mortgage.

The thought being that the interest expense paid for mortgage on the rental is deducted from the gross rents as an expense. If the rental mortgage was paid off, your income (from a tax perspective) would increase and you would owe more taxes. In addition your AGI would be higher and that may affect you qualifying for other AGI sensitive tax incentives (Roth IRA, HOPE, etc.).

Also, there is no 2% AGI floor to contend with on the rental mortgage interest expense.

The argument because even more lopsided if you are subjected to AMT.

Again these are my random, quick thoughts on the matter, I would consult a CPA to be sure.

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