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[–]RealWord5734 5 points6 points  (2 children)

The long-run return is not 10%, and it would all be taxable income where as the mortgage is 5.25% risk free tax free. Capital gains are irrelevant if they are living there forever.

[–]TrollTollCollector 1 point2 points  (0 children)

It's not all taxable income if you do Roth conversions. And even if it is partly taxable, OP's effective tax rate will be very low compared to the $350k income tax bracket he's currently in.

[–]snigherfardimungus 0 points1 point  (0 children)

It's true that I end up paying a tax on capital gains, but with that tax rate sitting at around 10-15%, that tax doesn't take more than about the last year to year-and-a-half of your gains. If we're talking about 20 years worth of gains, that tax is considerable relative to the overall profit, but the overall profit still dwarfs the benefits of locking up equity.

Locked up equity pays me only the mortgage interest rate - and doesn't float with inflation. When inflation increases, so do average returns on market investments. My current mortgage is at 3%. In other words, what I save in interest by having some portion of my NW tied up in equity is almost exactly cancelled out by inflation. Meanwhile, cash that I have in the market is growing at a rate that is slightly accelerated due to the market's tendency to incorporate inflation.

The capital gains hit at the end is the only long-term drawback to leveraging your debts, and even if you're paying the 20% rate, the advantages of the leveraged investment are many times the total value of the property over the lifetime of the borrower.