Rent vs. Buy

[GoUSC]

I created a very good excel spreadsheet to help me in my analysis. If you would like it just email me at radelow AT yahoo DOT com.

[GoUSC]

I created a very good excel spreadsheet to help me in my analysis. If you would like it just email me at radelow AT yahoo DOT com.

[rb_engineer]

Clearly, I don’t agree with the conclusion with this specific situation. What did I miss?

[rb_engineer]

Clearly, I don’t agree with the conclusion with this specific situation. What did I miss?

[PerryChase]

Taxes. Getting a tax break is oft cited as the reason to buy.

But many homebuyers aren’t able to fully realize the tax savings. For example if one in unemployed for a while and has to pay the mortgage out of savings, the tax savings are gone. In that case, losing employment will cause the homeowner to pay even more, while he’s cash-strapped, since the tax subsidy is gone.

Lower income homeowners who over over-stretch their purchasing power by using toxic mortgages don’t have the income to fully take advantage of tax savings. Remember, a family with 3 kids already has the standard deduction and personal exemptions.

Real estate boosters often cite that foreigners will come in droves to US “glamour” cities thanks to the weak dollar. Foreigners who are not Green-Card holders and taxpayers don’t get a tax break for owning in America. Why would they want to own a condo in San Diego and pay all the associated costs? If they want to vacation in San Diego, they can stay at any number of nice hotels. Getting a Green Card means paying US income tax.

Likewise for rich American folks. Why would they want to own a home in San Diego just to stay there for a few weeks. Might as well stay at the hotel. Want a place to stay after the ball game? Book a limo to take you to a nearby hotel room.

Therefore I posit that buyers bought mostly because of the protential appreciation (as well as the enjoyment). Take away the appreciation and buyers will dry up.

[PerryChase]

Taxes. Getting a tax break is oft cited as the reason to buy.

But many homebuyers aren’t able to fully realize the tax savings. For example if one in unemployed for a while and has to pay the mortgage out of savings, the tax savings are gone. In that case, losing employment will cause the homeowner to pay even more, while he’s cash-strapped, since the tax subsidy is gone.

Lower income homeowners who over over-stretch their purchasing power by using toxic mortgages don’t have the income to fully take advantage of tax savings. Remember, a family with 3 kids already has the standard deduction and personal exemptions.

Real estate boosters often cite that foreigners will come in droves to US “glamour” cities thanks to the weak dollar. Foreigners who are not Green-Card holders and taxpayers don’t get a tax break for owning in America. Why would they want to own a condo in San Diego and pay all the associated costs? If they want to vacation in San Diego, they can stay at any number of nice hotels. Getting a Green Card means paying US income tax.

Likewise for rich American folks. Why would they want to own a home in San Diego just to stay there for a few weeks. Might as well stay at the hotel. Want a place to stay after the ball game? Book a limo to take you to a nearby hotel room.

Therefore I posit that buyers bought mostly because of the protential appreciation (as well as the enjoyment). Take away the appreciation and buyers will dry up.

[beanmaestro]

You also forgot the 401k deduction. If you’re paying a mortgage, there’s a good chance you’re only putting enough in your 401k to get a match, and not using the $15.5k ($31k for couples) limit. And even if you can use most of that deduction, are you missing out on Roth contributions to do so?

[beanmaestro]

You also forgot the 401k deduction. If you’re paying a mortgage, there’s a good chance you’re only putting enough in your 401k to get a match, and not using the $15.5k ($31k for couples) limit. And even if you can use most of that deduction, are you missing out on Roth contributions to do so?

[rb_engineer]

vrudny,

I apologize for being a bit confrontational. I just wanted to point out the other of the story since I believe that the decision is not so black and white.

So, from the $432 in savings you mention, you have not subtracted the principle being paid off every month, right? This will get you even closer. I guess unless you had an I/O which I don’t think you did.

Personally, I think you made pretty good moves. You made $30K in 1 year after taxes! But I also believe that there are people who’ll trade that 30K to keep the home.

[rb_engineer]

vrudny,

I apologize for being a bit confrontational. I just wanted to point out the other of the story since I believe that the decision is not so black and white.

So, from the $432 in savings you mention, you have not subtracted the principle being paid off every month, right? This will get you even closer. I guess unless you had an I/O which I don’t think you did.

Personally, I think you made pretty good moves. You made $30K in 1 year after taxes! But I also believe that there are people who’ll trade that 30K to keep the home.

[cyphire]

Very good points PerryChase…..

Cyphire…

I am now in my house 2 months… I am so happy I am renting!!!

[cyphire]

Very good points PerryChase…..

Cyphire…

I am now in my house 2 months… I am so happy I am renting!!!

[garysears]

I have a question about the perceived tax “savings” of the mortgage interest deduction. I am married (no kids) and filed the 1040EZ last year. I am not currently itemizing deductions as I am a renter and have no taxable investment earnings. I don’t think I can come up with more deductions than the standard deduction as I consider my living expenses relatively low and nonqualifying.

The standard deduction was $16,900 per year last year for married couples. Now if I were to begin itemizing my deductions after buying a house I would have to come up with $16,900 before I started saving any money. I intend to buy a property in a few years under 200K. Here is a conservative calculation I did:

My interest payments the first year at current rates (7.0 for 200K loan) would be $13,935.65. I still would need to have $3K more in deductions before I started seeing any benefit. I just don’t think that my case would yield significant mortgage interest tax “savings”.

I don’t assume any tax benefit when calculating the rent vs buy numbers. The principal payments only add up to $2031 the first year. It would take a number of years for the principal payments to start making a significant monthly difference. At the end of year 3 it would finally get to $200/mo (36th payment) which is only $110 more than the first payment. (It would take 13 years to reach $400 per month in principal).

Can any one point out what I am not understanding? I am a tax novice so I could be missing something completely. How would the mortgage interest payments be a tax advantage for someone like me?

[garysears]

I have a question about the perceived tax “savings” of the mortgage interest deduction. I am married (no kids) and filed the 1040EZ last year. I am not currently itemizing deductions as I am a renter and have no taxable investment earnings. I don’t think I can come up with more deductions than the standard deduction as I consider my living expenses relatively low and nonqualifying.

The standard deduction was $16,900 per year last year for married couples. Now if I were to begin itemizing my deductions after buying a house I would have to come up with $16,900 before I started saving any money. I intend to buy a property in a few years under 200K. Here is a conservative calculation I did:

My interest payments the first year at current rates (7.0 for 200K loan) would be $13,935.65. I still would need to have $3K more in deductions before I started seeing any benefit. I just don’t think that my case would yield significant mortgage interest tax “savings”.

I don’t assume any tax benefit when calculating the rent vs buy numbers. The principal payments only add up to $2031 the first year. It would take a number of years for the principal payments to start making a significant monthly difference. At the end of year 3 it would finally get to $200/mo (36th payment) which is only $110 more than the first payment. (It would take 13 years to reach $400 per month in principal).

Can any one point out what I am not understanding? I am a tax novice so I could be missing something completely. How would the mortgage interest payments be a tax advantage for someone like me?

[temeculaguy]

Gary, you are correct that you are mistaken. Without going into all the gory details, the best way to run scenarios is to take yor tax software from last year and do a run through with some estimates if you were to have owned a house, then you can get real close to what you would have saved. If you don’t have tax software you can borrow 2006 turbo or tax cut or even find it dirt cheap in stores since it is obsolete now.

The big thing you missed was that even when you itemize you still get a deduction per person of 3,300. The standard deduction is not 16,9k it is 10,300k, then you add on 3300 per person but you wont lose that when itemizing. State, local and property taxes are also deductable when you itemize and not so when taking the standard so you probably come close to covering the threshold right there and all your interest would be over the top. Once you begin itemizing you can take a few more things that you weren’t (work expenses, safety deposit box, etc.) that you don’t get to when taking the standard, so it opens the door to other deductions. I didn’t own a house last year for the first time in a long while and my tax software still said it was better to itemize than go standard, so for me I know the entire mort interest will be above the threshold, best advice, run a pretend tax scenario and compare it to your real one. If you have this simple of a tax situation and you pay someone to do your taxes for you, stop doing that and do your own while it’s simple just for the education. save the receipt for the software, it’s deductable as well.

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