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Think of interest as rent

Q. I inherited some money when my grandmother died last winter, and as you wrote in a recent column, it could be a good investment to pay off the mortgage on my house. I wrote to my bank, and they sent me a figure for paying off the mortgage. It's only a little less than what's listed as the principal on my other statements from them.

What I don't understand is, shouldn't they give me credit for the interest I've paid all these years? If I have to pay the whole principal figure, I don't see that it's worth doing.

A. Years ago we used the bank's money to buy houses. Think of interest as a sort of rent you've been paying in return for the use of their money. If you moved out of an apartment you wouldn't expect the landlord to return all the rent you'd paid in the past. You got something in return: the use of the apartment. And the bank won't return the money you paid in interest.

Part of each monthly mortgage payment has been going toward paying down the debt, which is why the remaining principal is a bit less every month. But that amount is what you owe now.

No single financial move is right for everyone. In some situations, though, paying off a mortgage is a good investment. It'd be like buying the apartment, as there'd be no more need to pay rent.

Q. I am responding to a reader's question about being a landlord out of state. I am a retired military officer. I have sold property out of state, and I have rented homes from thousands of miles away because I either couldn't sell them or I was going to return to them later.

I would never consider handling these things myself! I paid professional Realtors to handle everything. They would call and discuss their choice of tenants with me, but they screened and chose the tenants, collected and banked the money for me, and also arranged the repairs.

There were house rental managers everywhere except Minneapolis, Minnesota. I got by there, but it was not nearly as successful as renting my homes in Texas and Florida, where professionals handled the entire process.

A. Thanks for sharing your experience. Professional property managers reading this will appreciate your kind words. There are surely some in Minneapolis. Too bad you never located them.

Q. My daughter and I own my house together, and it says on the deed that we are joint tenants with right of survivorship. You said in a recent column that that means she'd inherit the house automatically when I die. But will she have to pay inheritance tax? And does it make a difference that she's been paying the property taxes and most of the other expenses for the past 10 years? This matter is bothering me. Your answer will be appreciated.

A. It won't make any difference that your daughter has been paying those expenses. As far as the Internal Revenue Service is concerned, there's no estate tax on anything left to a spouse, and on the first $5.45 million after that. My guess is that, like most of us, you and your daughter have nothing to worry about for federal taxes.

I don't know where you live, but every state except New Jersey allows at least a million dollars to pass free of estate taxes. (In that state the exemption is $675,000.)

Q. Last winter my husband inherited a house from his grandfather. It's free and clear with no mortgage. We are renting it out. Will we be able to depreciate the house on our income tax returns?

A. Depreciation is a tax-deductible landlord expense that will help lower the amount of profit you declare each year on income from that rental property. It's based on the theory that the value of your property drops every year, which, of course, it seldom does.

How much your husband can - and should - deduct for depreciation is calculated using his cost basis for the property. It has nothing to do with mortgages. The cost basis is probably the value of the house when he inherited it.

Some day, if your husband sells the property, he'll have to "recapture" and pay a capital-gains tax on past depreciation he claimed or could have claimed. It's important to include the figure in your tax return, and to get it right. Now that you're real estate investors, you should seek professional help from your accountant or tax preparer.

• Contact Edith Lank on www.askedith.com, or 240 Hemingway Drive, Rochester NY 14620.

© 2016, Creators Syndicate

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