Does it make sense to pay thousands of dollars in taxes in order to make a large one-time mortgage payment?

by James D. Adelsperger, CPA | Aug 10, 2018

We're 61 and 51, with $150,000 left on a 15-year mortgage at 3.25 percent. We'd like to make a one-time $20,000 payment, but we'd have to tap unrealized gains (and pay about $4,000 in taxes, we're told). Does this make any sense? Our financial adviser signed off on the idea, but aren't we losing money?

It is difficult to answer this question with certainty with the limited information given, but my sense is that this does not make financial sense. A 3.25 percent fixed-mortgage rate is very attractive in a rising interest rate environment. Also, we are beginning to see slightly higher rates of inflation, which is good for borrowers because they are paying back their loan with ever cheaper (meaning reduced purchasing power) dollars.
Further, you are proposing to pay a $4,000 tax bill to save roughly $650 per year. That means a roughly 74-month payback period. I don’t have the details to know if the remaining term of the mortgage justifies that expenditure.
Finally, you are giving up liquidity by cashing an investment that is presumably earning something and sinking the cash into illiquid real estate.
There may be other reasons of which I am not aware that override the thoughts above, but in general I don’t think it makes sense to do this.

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Answered by: James D. Adelsperger, CPA, is senior wealth adviser with Domani Wealth in Lancaster, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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