Is Paying off Your House the Right Move in Light of New Tax Law?
Despite what you may be hearing and reading, paying off your home may not be the right decision for you. Homeowners need to look beyond taxes and consider the impact on investments, cash flow and lifestyle.
The new tax laws enacted at the end of 2017 changed the potential tax benefits of homeownership for many. Two major changes include:
- The new rules cap the amount of state and local taxes (SALT) that can be included in your itemized deductions at $10,000. The main components of SALT that will affect most people are state income taxes and the property taxes on your home. In many areas, $10,000 in annual property taxes alone is not uncommon.
- The standard deduction has been increased to $12,000 for single filers and $24,000 for those who are married filing jointly. This means that for those whose total itemized deductions are less than these amounts, taking the standard deduction is more beneficial.
The combination of these two changes means that for many taxpayers, itemizing deductions will no longer be the best choice as the combination of the now limited SALT deduction and mortgage interest deduction will fall below the standard amount. Some advisers are now suggesting that those who can should consider paying off their mortgages.
As a financial adviser, my answer to whether a client should pay off his or her mortgage depends upon the individual’s situation. This is not just a tax decision; considerations go well beyond that. Here are a few things to think about when evaluating your unique situation.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Emotional versus financial issues
Our homes are more than just a financial asset. This is the place where we live our lives, where our family memories are made.
For most people, having paid off the mortgage by retirement is a good idea. Not having a mortgage payment during retirement can make your retirement savings, Social Security, pension and other retirement assets go further.
Many retirees want to downsize at this stage of life. Ideally, they will sell their home, and use the proceeds to fund a substantial down payment or to pay cash for a smaller home with some money left over to add to their nest egg.
For those still accumulating assets for retirement, however, the sense of security of living in a paid-off home should be weighed against whether paying off your mortgage is the best use of this money.
Trading liquid assets for illiquid assets
Eliminating a mortgage payment can be attractive. Who wouldn’t want to get rid of a sizable monthly outlay? While a home is many things, it is still an investment.
Taking $100,000 or $200,000 or more and paying off your mortgage is an investment decision. By doing this you are saying the best use of this money is tying it up in your home, which is an illiquid investment.
Before you do this, ask yourself:
- Might I have a need for this money over the next few years? If it is tied up in a home, accessing it will be difficult at best. Before you pay off your mortgage be sure that you have sufficient liquid assets to meet any anticipated or unexpected expenses.
- Will paying off your house offer the best return on this investment? Would you be better off taking this lump sum and investing it elsewhere, perhaps in a diversified portfolio tailored to your unique situation?
Over the 23 years ending in 2016, the compound annual growth rate (CAGR) for stocks was 9.66%. This compares to 3.81% for home prices nationally over the same period. This is not a uniform rate and price appreciation varied, but returns on homes still paled in comparison to the returns on equities.
Housing prices don’t always go up
While housing prices have been strong in many areas of the country this year, that has not always been the case. In some areas housing prices still haven’t recovered since the housing bubble burst a decade ago. Ask yourself, will taking liquid assets and paying off the mortgage balance provide a better return on investment than investing those funds elsewhere?
What’s the right decision for me?
Everyone’s situation is different. While the security of a paid-off mortgage can be tempting, it should be weighed against other uses for the money. These might include other investments or simply having a sufficient emergency fund.
As with most issues, tax considerations are not the only driver of this critical financial decision. Financial decisions are complex and should almost never be determined by just one factor.
-
S&P 500 Hits New High Before Big Tech Earnings, Fed: Stock Market TodayThe tech-heavy Nasdaq also shone in Tuesday's session, while UnitedHealth dragged on the blue-chip Dow Jones Industrial Average.
-
4% and Chill? Find Out If This Distribution Rule Fits Your RetirementTake this simple quiz to discover whether the 4% Rule will work for you in retirement.
-
Oregon Tax Kicker in 2026: What's Your Refund?State Tax The Oregon kicker for 2025 state income taxes is coming. Here's how to calculate your credit and the eligibility rules.
-
I'm an Estate Planning Attorney: These Are the Estate Plan Details You Need to Discuss (And What to Keep Private)Gen Xers and Millennials would like to know if they're going to inherit (and how much), but Baby Boomers in general don't like to talk about money. What to do?
-
I'm a Financial Adviser: This Is How You Can Minimize the Damage of Bad Market Timing at RetirementPoor investment returns early in retirement on top of withdrawals can quickly drain your savings. The ideal plan helps prevent having to sell assets at a loss.
-
'You Owe Me a Refund': Readers Report Challenging Their Attorneys' BillsThe article about lawyers billing clients for hours of work that AI did in seconds generated quite a response. One law firm even called a staff meeting.
-
7 Questions to Help Kick Off an Estate Planning Talk With Your ParentsIt can be hard for aging parents to discuss estate plans — and for adult kids to broach the topic. Here are seven questions to get the conversation started
-
Down But Not Out: 4 Reasons Why the Dollar Remains the World HeavyweightThe dollar may have taken a beating lately, but it's unlikely to be overtaken as the leading reserve currency any time soon. What's behind its staying power?
-
What Not to Do After Inheriting Wealth: 4 Mistakes That Could Cost You EverythingGen X and Millennials are expected to receive trillions of dollars in inheritance. Unless it's managed properly, the money could slip through their fingers.
-
'The Money Prism' Solves Retirement Money's Biggest Headache: Here's HowThis simple, three-zone system (Blue for bills, Green for paycheck, Red for growth) helps you organize your retirement savings by purpose and time.
-
No, AI Can't Plan Your Retirement: This (Human) Investment Adviser Explains WhyAI has infinite uses. But creating an accurate retirement strategy based on your unique goals is one place where its possibilities seem lacking.
