A way around having to give up that 2.75% mortgage
October 27 - November 2, 2025
By Richard Courtney
The insanely frenetic real estate market of 2020 was unprecedented, and it is doubtful that interest rates will ever fall into the historic low numbers seen during that era.
Interest rates dropped to below 3% for the first time and remained as low as 2.75% into 2021. During those two years, the real estate market experienced its most robust two years, and mortgage lenders were swamped with refinances.
As homeowners who bought in that period and those who refinanced their mortgages have experienced changes in their lives, they are nonplussed as to how to transition into new housing. For those moving into new locales, the thought of exchanging a 2.75% mortgage for a 6.25% mortgage is ominous, and the increase in monthly payment for the same home is tough to digest, even if financially feasible.
Fortunately, those who bought early enough will have accumulated quite a bit of equity in their homes and can reap those rewards by putting that cash down on a new home. However, there are taxes involved, and forfeiting a 2.75% loan could prove nauseating. However, Scott Fosgate with Atlantic Bay Mortgage group has a plan.
Rather than sell the house, pay taxes on the gain, place the remaining money down on a home that might not have the appreciation potential of a home in Nashville, it is time to become a real estate investor.
While still a resident of the home, the owners should secure a home equity line of credit.
While looking for a home in the new city, the owners should seek a renter for the current residence and get a lease in place. In the Midstate area, with rental rates through the roof, the owners turned landlords should realize a positive cash flow that will prove beneficial as the situation progresses.
Fosgate cites the “Departing Residence Rule,” in which the homeowner can use 75% of the income from the lease to offset the payment on the house. After locating a property to purchase, the buyer can draw on the home equity line of credit that is already in place and use those funds to purchase the new home. If the stars and dollar signs are aligned, the lease could offset the existing 2.75% loan and the home equity line of credit.
That is not the end of the good news, as there is an instrument known as a 1031 property exchange.
After at least five years of having a free house in Nashville, the homeowner turned investor might have a need for a significant cash infusion, but the taxes on the gain would be significant. Perhaps, the person who came upon a real estate investment in the city and would prefer to own properties closer to the current home or might want to buy a place in Jackson Hole or 30A or anywhere USA.
When the owner sells the property, or relinquishes it in 1031 terms, the seller has 45 days to identify a new property, or several properties. The seller who relinquished the property becomes the buyer or “the exchanger” in 1031 terms and must spend gross amount equal to the property that was sold. When that is done, there is no tax on the gain. One caveat: If there is a loan on the relinquished property, there must be an equal loan on the new property.
The 1031 exchange is complex, and those seeking to participate should consult with attorneys and accountants. But is can be a valuable tool for avoiding taxes on real estate gains.
As Bill Decker, president of Decker Wealth Management, once said: “The real estate industry must have a much better lobby in Washington.” In his world, a client cannot sell $1 million of one stock and buy $1 million of another and not pay taxes on the gains.
Richard Courtney is a licensed real estate broker with Fridrich & Clark, LLC and can be reached at richard@richardourtney.com.
