*Below is to show an example in a particular situation. In real life, you may have to consider your unique case and consult with an appropriate professional.
In the past two blogs, I wrote about why it may be better not to pay off your mortgage. First of I talked about getting a better cash-flow by NOT paying off your mortgage but buy more properties. The second blog talked about extra appreciation you get by buying multiple properties. In this blog, I will talk about this hidden benefit called “depreciation.”
Generally speaking, in the long run, the price of real estate has been going up. It is called “appreciation.” However, that is not how the IRS looks at rental properties. They think the exact opposite. For them, rental property is something that loses all its value in 27.5 years. What it means is that we can expense 1/27.5th of the property (land not included) value for 27.5 years.
Let’s take a look at $100,000 property. Assuming the land value is $20,000, and the property value (without the land) is $80,000. $80,000 divided by 27.5 years is $2,909. That is the amount you can subtract from your income. Simply put, if your effective tax rate is 20%, you pay $2,909 X 20% = $582 less in tax, which means $582 in your pocket. Imagine if you have eight properties like this. You get $582 x 8 = $4,656 by doing absolutely nothing extra.
The first of the “Should I pay off my mortgage?” blog series explained about the $11,689 extra cash you will receive from the rent, and the 2nd blog explained about the extra $21,000 equity you receive from the appreciation, and this blog explained about the $4,656 you pay less in tax. The total is $37,345 extra money, compared to paying off the mortgage. Do you still want to pay off your mortgage? I’ll explain more benefits of why you should not pay off your mortgage in future blogs.
