Q: I have three rental properties. Two are paid for. The other one has a mortgage balance of $20,000 with 11 years to go until it is paid off. The interest rate is 6.575 percent. Should I pay off this mortgage?

A: I don’t see why you’d pay that off at the moment, unless you have an extra $20,000 in cash and you don’t know what to do with it.

With rental properties, the idea is offset the income with expenses so you pay less in taxes. If you sell the rental properties, capital gains taxes are capped at 15 percent at the moment, but income taxes on your gains from the ownership of the rental properties can be as high as 35 percent. So paying less in federal income taxes might be a better deal for you depending on your federal income tax situation.

One thing to keep in mind, while the 15 percent number for capital gains and the 35 percent number for income taxes are the current numbers, these numbers may change depending on who wins the presidency. But most people in the real estate investment industry might tell you that you should manage your properties wisely but make sure you take advantage of any tax benefits you get from the investment properties to reduce your current federal income taxes.

Published: Oct 24, 2008