Complicated Financial Position

[dub18]

HI everyone,

I am in a unique financial position and thought I would ask for insight - just in case I am missing something in my own discernment of what I should do. Here is my current standing.

Important Note: I am an American who lives overseas. I pay no federal income tax, nor do I get tax breaks per se (i.e. extra write offs).

Cash on Hand: $100,000

Current Interest being made on Cash on Hand: 8% on $70,000 of it, 1% on the rest. I live overseas and get a good interest rate on my money.

Current Debt: Paying on a 30-year note for a home. Bought home 5 years ago, at 4.75% APR, for roughly $155,000 and owe roughly $130,000 on it now - having made no extra payments at any point. My mortgage payment is $750/month. Since I live overseas, I have a renter and he pays me $950/month to live there (which basically breaks me even after mortgage payment, real estate taxes, and home owners insurance).

Finally, I do have about $50,000 in retirement savings nestled away.

My biggest question would be if I should pay off my mortgage in a year or so when I have enough $ to do so, or not pay it off and just keep my bankroll making interest since the interest rate is higher? Maybe since it is a rental, it wouldnt be in my best interest to do that? Maybe because I make more in interest overseas, it isnt in my best interest to do that? However, since I live overseas and pay no income tax - I also get no breaks on my mortgage insurance, etc.

If I decided to pay off my home 20 years early, would I then be on the hook for my renters rent payment each month as income?

I would love any helpful advice. Thanks for listening!

Dub18

[TBH]

I'm very confused. If you live overseas but you're still an American citizen, don't you need to pay American income taxes? I have a relative who has been living overseas for many years, but he continues to pay American taxes because he wants to retain his citizenship in case he ever decides to move back.

I think you're supposed to file Federal taxes in the states. I really do. If you live in a country with a reciprocal tax agreement with the US, you probably still have to file taxes because of your renter in the US, even if most of their rent goes to pay mortgage interest, maintenance, etc.

If I were you, I would probably leave the mortgage on the house alone. I'd leave the money earning 8% where it is (how do you get 8% on liquid cash savings anywhere in the world!?) and I'd take the amount earning 1% and invest it in the stock market. Or, if you feel like it, you could use a portion of it as a downpayment on another rental property. But I'd think the stock market is a better bet since you're already heavily weighted toward real estate.

Not only is that $70K earning more interest than your mortgage is costing you, but it might also be hard to move that money back to the states if it's invested overseas. The dollar is still not awesome against many global currencies. I might be just as happy leaving it outside the US if I were you.

[dub18]

Reply to TBH

TBH,

I am sorry - I should have been more clear. I have such a complicated situation, its easy to get lost in the details sometimes.

In re: to not paying federal income tax, I fall under the "Foreign Income Tax Exclusion." This is pretty well known - and I am surprised your friend doesnt know about it - but maybe it doesnt apply to him/her depending on how they are working and moving to/from USA. In order to qualify (to not pay federal income taxes), you must first pass what is called "bona fide resident physical presence" test - which is you have been outside the USA for 330 out of 365 days. If you pass this test, you can opt out of paying income taxes. I do still file taxes every year, but because I live and reside overseas - my tax bill is 0 - and my employer withholds no money from me each pay period.

On my 8% - I should have been a bit clearer. It is not completely liquid. I make 60 day deposits for 8%. That is pretty close to liquid though.. This is in India. And I get lower rates because I am a foreigner. Indians can get 9-10%. But, on the flip side for them they also have to pay 12-15% to borrow money to buy cars and houses and things. Luckily for e, I am only renting, etc. Of course, as you know, it is great to get 8% - but I am then also commitment to the winds of change for currency ups and downs. And even though the USA is struggling - the rupee is somehow still a little weaker by and large.

TBH - have any idea on this house ownership question. If I pay off my house way early, thus I have no mortgage payment anymore - does my renters money given to me now count fully as income?

Thanks for your reply.

[TBH]

Well, I am not an expert on international tax law, obviously! Thanks for explaining. My relative's situation is complicated. He lives in one country, works in another, and his wife works on an American military base so she gets paid in dollars into an American bank account. Their tax situation is really complicated.

In the US, rental income counts as income. Even if you have a mortgage, some of the rent is going to paying down the principle on the loan, so that is actually building wealth for you and it's taxable income.

I think if you paid off your mortgage, you would still have some expenses--property taxes, insurance, maintenance, management fees, etc--but yes, more of the rental income would be taxable if you didn't carry a mortgage on the property.

I think you need to ask yourself where you want your assets to be. If you want them in India and in rupees, then I'd leave the money in India earning 8%. If you're planning to move back to the US, want to move assets to the US, feel more secure about currency valuations in the US, then maybe it makes sense to move some of that money back to the US and start paying down your mortgage early.

Do you ever intend to live in the house? Sure would be nice to move back into it some time and have a paid-off mortgage.

I still think if you can stomach being an absentee landlord it might make more sense to buy a second house with that money rather than paying off the first one, but it would also make me nervous to own a rental when I was on the other side of the world.