A photo illustration of the word mortgage with the shadow of  a house key.
A photo illustration of the word mortgage with the shadow of a house key. - 

Question: I owe on $5,500 left on my mortgage and could easily pay off the whole thing right now. However, I wondered what the tax consequences would be of paying off the mortgage now in 2011 or paying as it comes due, in Dec., Jan. and Feb?

Are there penalties, or is it such a small amount I might as well pay it? I don't understand the capital gains part of the taxes: is it better to pay off a house in Dec for the 2011 tax year, or in 2012 for that tax year? I know people who get married or have babies with year end tax implications in mind. Elizabeth, Indianapolis, IN

Answer: I would pay of the mortgage.  Enjoy the moment when you own your place free and clear of the bank. Congraulations.

You only have to worry about capital gains taxes when you sell the home. Even then it's doubtful you'll owe anything to Uncle Sam. So long as it has been your primary residence (you've lived in it for two out of the past 5 years before sale) joint filers don't owe capital gains taxes on the first $500,000 of profit. The comparable exemption for single filers is $250,000.

Sign up to stay connected to Marketplace and you could be in for a Halloween treat!

Subscribe to our daily newsletter by Oct. 31 and you're automatically entered to win one of 10 Marketplace treat bags. They're filled with some great swag, plus something unique to give you a peek behind the scenes — a program rundown signed by Kai Ryssdal.

Subscribe today for your chance to win – and good luck!

Follow Chris Farrell at @cfarrellecon