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Oct 12 2009 12:00AM

Question


I have a $351,000 interest only mortgage loan at 6.75 percent. I have another property which I own free and clear. My intention was to sell this property and pay off my mortgage. My income will soon be reduced drastically as my ex-husband will stop alimony payments when he retires. Should I sell this property at a loss of $100,000 and pay down my mortgage, or should I wait until the property market perks up?

Answer


According to FPA member Rich Schuette, CFP®, at VIDA Wealth Partners, the bottom line is one of cash flow. "To the extent you have enough to pay for your other expenses after those you have shared, I would encourage you to hold out on selling the income-producing property," Schuette said.
 
Here's whay Schuette recommends against selling the property for the following reason: Should you be able to sell the property at $199,000, your net after closing costs and commissions will be around $180,000 to $185,000. In order for that money to create the same pre-tax return, you would have to earn roughly 5.25 percent. The interest rate on your existing mortgage after tax is likely to be closer to about the 5.25 percent you are currently netting from rent before you factor in the deprecation you can take on the rental. So, even if there were no loss in the rental property, your money in an after tax scenario is likely providing a better yield than if you paid down your mortgage by the same about. "Remember, these are estimates as your personal tax situation could make it different, and I have not factored in insurance and property taxes to the equation," said Schuette. He also advised that you consult with a qualified tax professional in your area if you wanted more specific numbers.

"This being the case and also factoring in the temporary loss of principal on the investment property makes the case for holding on compelling," said Schuette.

As for the tax on the sale, Schuette said, "If the loss is real then you should have no tax consequences. However, you need to double check with your tax professional as any depreciation you have taken will be added back into the equation."

Of course, if other income sources will not provide for the necessities, Schuette said "you may still consider selling the property, paying down some of the existing mortgage on your primary residence and holding some back to give yourself a reasonable buffer for other unknown expenses should they occur."

FPA member, Brent Hanson, CFP®, of Royal Alliance said your question presents two concerns:

  1. It appears that when your ex-husband retires, you will need that house payment to be taken care of either by paying off your mortgage or having enough income to make the payments.
  2. The loss you will incur if you sell the property now vs. the possibility of less or no loss later.

"No one can tell you how your second concern will turn out of course," Hanson said. "The market will eventually pick up but the question is when vs. the date your ex-husband plans to retire."

That said, here are some alternatives to selling that you could consider:

  • Rent the other property to help pay your mortgage payments. One note of caution: if you rent the other property, you need to have some reserves to deal with vacancies, and repairs when tenants move out.
  • If you are 62 or older, consider a reverse mortgage to pay off a large portion of your home loan. Ask your lender to transfer any remaining balance on the loan that the reverse mortgage couldn't pay off to the other property and then rent the other property to pay that mortgage.
  • If you are 62 when your ex-husband retires and you were married at least 10 years, you may be eligible to collect spousal benefits on your ex-husband's Social Security once he files for benefits, which could help your income level as well. If you are eligible based on your own work record, you can also apply for your benefits earlier or wait until a later age when they will be higher.
  • It is a hassle, and likely the worst suggestion, but you could consider petitioning the court to have your husband continue some alimony in retirement perhaps in addition to the aforementioned alternatives.

Hanson's bottom line is this: "If your ex-husband is retiring soon, and if none of these alternatives work for you, the real estate market right now is about as good as it may get for a few years, so, I would then suggest selling and paying off your loan."

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