Asking this question on behalf of my In Laws so I’ll try to give as much info as I know. My father in law is a pastor (MIL on disability) and they are about to pay off their house, but both their financial advisor and tax accountant have told them they should refinance Into another 15yr mortgage for an additional amount ($30k-50k) and redo kitchen, patio etc in order to take advantage of the minister housing allowance. My understanding is it allows them to deduct their mortgage from their taxable gross income, so is a significant tax savings. However we all think it’s always better to be debt free, as now their house is “on the line” again if they shut down the church or something and cannot make the payments. But the tax implications are significant, they mentioned I believe $6k in taxes they’d now have to pay if no housing allowance deduction. They weren’t able to contribute to their retirement for the bulk of his career so now have only about $170k in retirement in their mid 50s. Thoughts/advice to pass along are welcome!
I think that as long as your Father in Law is in good health and plans on being a pastor for many more years and the church is large and stable, I would say yes. His income will techincally be decreased once they payoff the house because he won’t get the housing allowance anymore?
I’d update the house
Do your in laws only get the housing allowance if they have a mortgage? Are they required by the IRS to spend it on a mortgage? (Reading through the IRS website, I’m not sure they’re required to spend it on housing at all…)
If the answer to both of the above questions is yes, I actually don’t hate the idea of keeping a relatively small balance on the mortgage in order to get that big tax break on the minister housing allowance income.
Although, the suggestion that they go spend it on a remodel kind of makes my stomach turn. If you borrow money just to spend it, any tax break kinda becomes irrelevant. (Sure, it might add to the value of the house, but usually remodels don’t nearly provide as much value as they cost… especially if you’re just doing it to spend the money you borrowed which is burning a hole in your pocket).
If they take that approach and take out a mortgage, I might look at investing that money outside of their primary residence and invest it in a rental property or index fund.
And, at the end of the day the simplest solution is also fine too. Don’t owe any money on the house. Live on less than they make. Invest early and often. That sounds like a happy and wealthy life to me. I’m no biblical scholar, but I think there’s probably scripture to back up not being in debt.