View: You should defer or shield as much income as comfortably possible until retirement to minimize your present tax bill. The odds of your retirement income equaling your working income is slim-to-none. Therefore, your retirement tax rate will be much lower.
In the process of refinancing my primary residence mortgage down to around 2.5% for a 5/1 ARM, it dawned on me to also check what the rates are for my conforming rental mortgage. I just refinanced my rental property last year from a 30-year fixed at 5% down to a 5/1 ARM at 4% because I took a stance that rates weren’t going anywhere, and that I would pay off the loan in 5-6 years time. Mortgage interest rates are back down to all-time lows as of 1/20/2015.
It turns out that I can refinance my rental property mortgage down to 3.375% from 4% with no out of pocket costs. At 3.375%, all the costs are baked into the rate. Conventional wisdom says to refinance your mortgage whenever you see rates 50bps (0.5%) lower than your existing loan, with a break even period of 12 months or less. With a break even period of 0 months, and 75bps lower, refinancing now is a no-brainer!
My net income from this particular rental is around $1,000 a month. That’s after HOA dues, mortgage interest, maintenance, depreciation and property taxes. Not huge, but better than a poke in the eye. If I had no mortgage at all, the net income would be closer to $2,400 a month at today’s rent, which is an income stream I’ve been planning for since first purchase. Unfortunately, I pay about a 30-33% effective tax rate (federal + state) on the rental income thanks to the progressive nature of our income tax system.
Then a light bulb went on………….