2

If I'm selling my home for a profit, does it make sense to pay more off the principal before doing so? On one hand, it seems a greater percentage of the sale would go to you, but on the other hand, you'd be paying higher taxes.

  • Tagged united-states, removed other tags to make it fit; I believe the united-states tag is accurate based on OP's profile, and relevant as mortgage interest is tax-deductible in the US and nowhere else (afaik). – ChrisInEdmonton Sep 15 '13 at 2:22
3

In the United States taxes on the sale of a principal residence are based on the difference between the sale price and the cost of the home. Assuming you meet the requirements you can shelter 250,000 or 500,000 of gains from the sale of your principal residence.

This calculation is not related to the loan balance. The basic equation is sales price minus purchase price. It get a little more complex because some costs to purchase and sell the home are included in the calculation, or if you made renovations to the house that will increase your costs and decrease your gains.

Trying to decrease the loan balance just before selling the house would just be paying yourself that money at the settlement table. It could save you some money on interest between now and settlement but emptying your bank account to save a few bucks doesn't seem worth it. I would also prefer to have the money in the bank to pay for some expenses that will popup getting the house sold, you moving, and the settlement date.

2

Paying extra principal is not a complicated decision.

You have a rate, say 5%. And you have an after tax rate, say, 3.75% (if you are in the 25% bracket and it's all deductible)

Are you happy to get a 3.75% after tax return?

If you have a retirement plan, and are not getting the full company match, that would be the first priority.

If you have other debt, say a 10% credit card, that's the next priority.

Is the sale soon? If so, I'd imagine you'd prefer to stay liquid, to have the next down payment ready without needing to rent in between.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.