San Diego Housing Bubble News and Analysis

If you are currently taking the Standard Deduction, the tax benefit is even less.

Another thing to consider is that those $400K currently will pay you $1666/month (minus taxes) @ 5% A.P.R. If you want to be absolutely fair about how much buying the house will cost you, you should add this amount to your payments.

Oh, I do consider what my return would be and that's just another thing that makes it really hard to rationalize buying now. I can rent a pretty sweet place for about $3500 a month (and I don't even think that's a bargain).

I do that, my money earns me $1500 or so, and it makes it hard to see why I should pay $4000 a month for the privilege of tying up that much money in a house right now.

Also, I see what you're saying about the standard deduction and that should be factored in. That is, true tax benefit is the amount your total deduction exceeds the standard deduction (it's not like you don't get any deduction at all if you don't itemize).

That said, I don't see why anyone would take the standard deduction instead of itemizing (if that's what you're also suggesting).

Any home owner who takes the standard deduction is either crazy or completely ignorant of tax laws. Of course, if prices continue to decrease, wouldn't it be wonderful if the standard deduction worked out to be MORE than using itemized deductions, all deductions considered?

Imagine interest, real estate taxes, points, etc adding up to less than that measly $5K or whatever the standard deduction is. That would mean we could all buy houses for $35K like our parents did.

Better have your tax preparer do a proforma AMT. Depending on your income all of the property tax may NOT be deductable. A lot of people are going to get burned on this. I have in the past(although I knew it was coming).

Additionally, I've heard that the Mello Roos, even though collected through the tax authority, is not deductible as property tax.

Hard to believe you could have to pay taxes on taxes (if you hit AMT limits). Ain't prop 13 and the tax code wonderful?

I don't want to turn this into a prop 13 bash post, but seriously, how much longer can it go on where people who live on the same street pay such a disproportionate share of the property taxes? This is, of course, especially pronounced in established areas of the city, but with the recent runup, it can even be a little ridiculous in fairly "new" areas.

Actually, one of the years in my house in Texas I ended up taking the standard deduction because I could not get my total itemized deductions to exceed $5000. This was my first year, so I was only in the house for 7 months and property taxes weren't due until the following year (in retrospect I should have paid the property taxes in December). The starting mortgage balance was $125,000.

Certainly this would never happen in CA given how much higher prices are; you'd definitely be paying tremedous amounts of interest here. But it was a real eye-opener for me at the time; I couldn't believe what I was seeing after everything I had been told about the supposed "tax-advantage". Even the following year, my itemized deductions weren't significantly more than $5000.

My standard deduction comment was more along the lines of rent vs buy decision where the renter is taking the Standard.

Right....so in that second year when I had about $6500 in total itemized deductions, my only real tax benefit kicked in for the last $1500. My taxable income was only $1500 less than what it would have been if I was still renting.

I don't have the tax tables in front of me, but obviously, I didn't save much money at all (to say nothing of all the other factors we discuss here; maintenace, opportunity cost, etc., etc.)

The real benefit of owning a residential property is in the tax favored aspect of gain in value which is in tandem with realizing a profit on appreciation. So the real question when considering a purchase is the potential for appreciation. The next factor is maximizing that appreciation through leverage.

The bottomline - buy the right home, buy at the right time, take out the right loan and finally, sell at the right time.

In terms of my income tax, deductibility generally kicks me back about 2 months of payments (PITI of about 2,200 a month). In my experience - it helps, and it keeps my costs (with a 20% down, 30 yr. fixed) pretty much in line with what it would cost me to rent a similar place (in Old Town, Alexandria, Va.)

BUT - what I am not sure about is where deductibility starts to lose steam if the AMT Alternative Minimun Tax) comes into play -- which it hasn't yet for me -- but, I have read that it can for folks with significant property tax and state income tax as deductibles. Anyone been caught in the AMT trap?

Larry J.

Sounds great if the property is appreciating, which doesn't seem to be the case right now. I bought a house in 1990 and it took almost 10 years for me to be able to sell it with any measure of real gain.

Even so, at a steady appreciation rate and assuming many folks just put all their proceeds into their next house (which has appreciated as well), it seems tough to realize those gains. Sure, no taxes on those, but my tax outlay continues to increase, as is the case for me this time if I get right back into home ownership.

I assure you, I'd love to own a home again (have my eye on one right now), but it's a bit tough to make economic sense out of the decision.

And to think, I might be one of the lucky ones...

bubble_contagion--

That's what I thought you meant and I'm glad you pointed it out since my calculations didn't factor that in at all.

I'm a homeowner, and I take the standard deduction, which if I recall correctly was approximately $10,000 last year. It is slightly more than I would get by itemizing, as well as being much less trouble and much less audit-prone.

Of course, I live in a state with no income taxes and have a fixed 5% 15-year mortgage less than 1x my yearly income.

Yes, it stopped me from buying a new house. My current property tax is $6,000 per year and due to AMT I can only claim about $2,700. So I told my wife to say good bye to the new house at the Woods in Eastlake. Over $20k in annual property taxes that would be non-deductable.

My landlord has been in her house since 1947. She regularly calls the city to bug them to trim the palm trees in front of her house and her latest campaign has been to repave the street (she lives in University Heights and honestly, the street is in pretty good shape. The city filled the potholes after the big rains two years ago).

She rails about "I pay property taxes and this is what is due to me" and... her prop taxes are $640 a year. Her property includes a house, four rental units, and two rental garages (she keeps two others for herself). Point taken with the above post about how incredibly skewed property taxes are from lot to lot.

I don't see my neighbors calling the city to complain about anything, they are too busy working three jobs to get their mortgages paid.

sdcellar

You're an idiot. Mello-Roos is typically not tax deductible, so the marginal tax benefit in the original example completely disappears.

Purchase price: $800,000
Down Payment: $400,000
Loan Amount: $400,000
Interest Rate: 6.5%
Tax Rate: 1.0%
Mello-Roos Rate: 0.5%
Fed Tax Rate: 25%
State Tax Rate: 8%

Interest Payment: $2,166.67
Property Tax: $1,000.00
(Originally stated) Tax Benefit: $1,045.00
Revised Tax Benefit: $935

and Chrispy, I've been meaning to mention that it's situations like your landlord that piss me off. Thanks for the perfect example.

Mello Roos is an assessment and is technically not tax deductible. In the REAL WORLD though, Mello Roos appears on your annual Real Estate bill and is paid at the same time. I dont know anyone that doesnt deduct them nor have I ever heard of any one having a problem deducting them even after IRS audits. To my knowledge, its never been tested legally. So you can basically make reasonable assumptions with them as tax deductible.

SDCellar....Apology owed

sdrealtor

Do I owe you or someone else and apology? You, me? I'm confused!

yeah, I'm in the same boat.

my wife and I were looking to buy our first house, but I ran the numbers. after considering the tax "benefit", we actually come out negative by about $10,000 to $12,000 a year. add to that, we would probably get hit with AMT - we make over $200,000 a year.

we make too much, according to the government, but we can hardly afford a piece of crap condo in south OC!

you can quote me on this: "only the uneducated have and are buying!"

"if people really understood, they wouldn't have bought!"