Well, here’s the approximate math.

Assuming 100% financing on $500k at 6% your monthly payment is about $3k. Let’s say that $2700 is interest. Total payment: $36k, interest: $32400.

Let’s assume a property tax rate of 1.1% for an annual bill of $5500.

Let’s also assume about $700/yr in insurance.

Therefore, your annual carrying costs of the house are $36000 + $5500 + $700 = $42200. Your tax write off is ($2700*12 + $5500)= $37900. Assuming a 28% tax bracket, this will save you $10600/yr in taxes.

So, your net annual outlay for buying is $42200-$10600=$31600. Your taxable income is $130,000-$37900=$92000

For renting at $2k/month, your annual outlay is $24k but you will also have to pay tax on the whole $130k (since we are assuming no other write offs) this increases your tax by the amount we subtracted before ($10600) so your net annual cost would be $24000 + $10600 = $34600 (if you assign all of the loss of tax write off to housing).

So, in essence, you are paying pretty close to the same amount to rent and buy (within a few thousand dollars). However, [b]in the long term[/b], owning a property should have some tangible benefits since you will be paying off the loan with cheaper and cheaper dollars and the house will increase in value (NOTE I said ‘long term’, not short term pump and dump investment).

Of course, this simple calculation ignores the additional expenses incurred by owning a house (maintenance, water/sewer/trash, etc).

For the rent calculation you need to subtract the standard deduction, $5,150 if you single or $10,300 if you married.

So the rental would be $24,000 + $10,600 – $5150 (or $10,300) = $29,450 or $24,300 if your married.

And, I think it would be tough to get a 6% interest rate anymore, especially with 0 down.

If you do have a significant down payment then you have to take into account the lost return on you down payment. You can easily get 5% in a short term CD right now, so if you put $100,000 down that’s $5,000/year (say $4,000 after taxes) your giving up too.

Of course the big unknown is what real estate values are going to do. If you’re renting a house and it’s going down in value by $25,000 a year….

Scott

As far as tax deduction is concerned, it has to do with
a) your marginal tax rate for the mortgage portion. It may not be your highest tax braket.
b) whether AMT comes into play for you.

And I assume that you’ve already itemized before a mortage due to state tax.

The max tax saving is total deductible amount (interest + property tax) x your marginal tax rate. Your realized saving might be lower due to the above factors.

http://www.irs.gov/formspubs/article/0,,id=164272,00.html

You noted, properly, that making the comparison for a single year ignored some important benefits of ownership (including steady mortgage payments versus rent payments that are likely to increase). However, with a current rental cost of $24,000 per year and a true after-tax ownership cost in the neighborhood of $40,000 per year for the case above, the rental case generates very substantial cash savings from the start.

You make a great point about rents increaseing while mortgage payments remaining the same (if you get a traditional 30yr fixed rate loan). Although you would initially pay more for mortgage payments, taxes and insurance at some point the cost will be the same, and towards the later part of your 30 years you would be paying less then rent. We would have to speculate on rent increases to come up with the exact dollar amount, but in this basic scenario it would be something to think about. For those fortunate buyers that purchased homes 2002 and prior, their payments may already be equal to or lessor then current rent for the same home. In today’s prices it may take longer then 5 years to get to break even point, but it will still happen within the loan term.