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  • September 12, 2006 at 11:38 AM #7479
    sdcellar
    Participant

    Greetings Piggingtons! First time caller, long time listener (okay, I’ve been around about a month or so…)

    Anyway, as much as it may pain some of you to hear this, we’re considering the purchase of a new house, but have yet to do so. I can go into more detail later if anyone cares, but for now, on to the point of my post.

    One of the common reasons given as to why it’s “Good to buy a home(TM)” is because of the tax benefit. That said, I was looking at my own numbers and this doesn’t seem to be the case, at least not when you’re considering new developments where Mello-Roos comes into play. The tax penalty turns out to be almost exactly equal to the tax benefit. For example:

    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
    Tax Benefit: $1,045.00

    The tax benefit is calculated by taking the deductible portions of the house payment (interest and taxes) and multiplying them by the federal and state tax rates.

    As you can see, in this example, the benefit is a whopping 45 bucks. I understand that you can play with numbers, but even if you were to pay no Mello-Roos, the benefit doesn’t seem all that great. Of course, you’ll also get more tax “benefit” by putting less money down, but I’m not sure anyone could rationalize that the increased interest payments “help”. Again, though, I didn’t make this example up, but ran into it based on my personal situation.

    Maybe this has always been the case and I just never realized it?

    September 12, 2006 at 11:53 AM #35059
    bubble_contagion
    Participant

    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.

    September 12, 2006 at 11:59 AM #35060
    sdcellar
    Participant

    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.

    September 12, 2006 at 12:03 PM #35061
    sdcellar
    Participant

    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).

    September 12, 2006 at 12:12 PM #35065
    Chrispy
    Participant

    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.

    September 12, 2006 at 12:23 PM #35066
    Anonymous
    Guest

    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).

    September 12, 2006 at 12:29 PM #35067
    Anonymous
    Guest

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

    September 12, 2006 at 12:30 PM #35068
    sdcellar
    Participant

    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.

    September 12, 2006 at 12:51 PM #35070
    OwnerOfCalifornia
    Participant

    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.

    September 12, 2006 at 1:09 PM #35072
    bubble_contagion
    Participant

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

    September 12, 2006 at 1:24 PM #35073
    OwnerOfCalifornia
    Participant

    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.)

    September 12, 2006 at 1:30 PM #35074
    Anonymous
    Guest

    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.

    September 12, 2006 at 1:58 PM #35076
    zeropointzero
    Participant

    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?

    September 12, 2006 at 2:33 PM #35080
    sdcellar
    Participant

    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…

    September 12, 2006 at 2:36 PM #35082
    sdcellar
    Participant

    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.

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