Study shows mortgage interest deduction doesn’t encourage home ownership

[spdrun]

CA Renter — how is renting SFH homes any different than buying anything else (like cars or power tools) on credit and opening a rental firm? Damn right that either example is a business, and all should benefit from loan interest deductions. If anything, the legalities and maintenance on real estate make it more work than some other rental businesses.

Want to keep homes affordable for primary residents? Make it a policy not to give loans where the cost of interest + taxes + expenses is greater than the market rent for the property.

Landlords seldom overpay, since their goal is to make a profit. The people who overpay are usually primary owners — because OHMIGOD IT’S GOT A PERFECT VIEW, and the YARD is soooo BIIIIIG, PER-fect for little Bratty and Bethie to PLAY OUTSIDE after SCHOOL. AND the KITCHEN TILE, so RETRO CUUUUUUTE! zOMG GUSH!

[SK in CV]

[quote=flu]
2. Even if they were to take out a loan, it wouldn’t be reported as mortgage interest deduction on schedule A. Again it would be investment interest expense on schedule E.

[/quote]

Not to be pedantic or anything, but interest paid while a property is being rehabbed may be investment interest, but it is not reported on schedule E. It would be reported on sched A (after a detour on Form 4952 where it’s limited to investment income) as investment interest, or probably more properly, capitalized as part of the cost of the property. Sched E is for reporting income for a trade or business that doesn’t go on Sched C or F. So if the property isn’t available for rent, the expenses shouldn’t (or at least legally can’t) be deducted there. “Investment interest” has a very specific meaning under the tax code, and it’s never deductible on schedule E.

[Coronita]

[quote=SK in CV][quote=flu]
2. Even if they were to take out a loan, it wouldn’t be reported as mortgage interest deduction on schedule A. Again it would be investment interest expense on schedule E.

[/quote]

Not to be pedantic or anything, but interest paid while a property is being rehabbed may be investment interest, but it is not reported on schedule E. It would be reported on sched A (after a detour on Form 4952 where it’s limited to investment income) as investment interest, or probably more properly, capitalized as part of the cost of the property. Sched E is for reporting income for a trade or business that doesn’t go on Sched C or F. So if the property isn’t available for rent, the expenses shouldn’t (or at least legally can’t) be deducted there. “Investment interest” has a very specific meaning under the tax code, and it’s never deductible on schedule E.[/quote]

Noted…Sorry brain fart.

[FlyerInHi]

[quote=spdrun]

Want to keep homes affordable for primary residents? Make it a policy not to give loans where the cost of interest + taxes + expenses is greater than the market rent for the property.

Landlords seldom overpay, since their goal is to make a profit. The people who overpay are usually primary owners — because OHMIGOD IT’S GOT A PERFECT VIEW, and the YARD is soooo BIIIIIG, PER-fect for little Bratty and Bethie to PLAY OUTSIDE after SCHOOL. AND the KITCHEN TILE, so RETRO CUUUUUUTE! zOMG GUSH![/quote]

haha.. I had a good laugh and very true.

People always complain of high prices of housing… and they expect to use other people’s money to buy. They get all vexed when an appraisal doesn’t support what they want to borrow.

Severely limit financing and housing will be more affordable for sure.

[The-Shoveler]

LOL, In places coastal SD people will also be more willing to pay more for a primary because they want to grab a piece of paradise for the long term, That why it getting to the point where you got to check the obituaries to see where the next home will come on the market,

Just kidding sort of.

Probably not a great Idea to sell just because prices have out grown rents in prime Coastal SD areas IMO, Just my two cents, but do what makes you feel right.

[FlyerInHi]

well, I wouldn’t sell now, because I think that well paid job growth for the region is still here, but if job market deteriorates…..

Remember, house values are not made by who are not selling but folks who are buying. As long was we have well paid, double income, engineer/scientist households willing to pay $1 million for a starter house, then house values are sustainable. But if there is a reset in tech, then we would lose those incremental sales that support values.

What if Lenovo mismanages Motorola and the company goes out of business.. What if Qualcomm falters? What if Whatsapp becomes write-off for Facebook, causing venture capital to run scared? Not saying that would happen, but nothing is forever.

BTW, I don’t look at high end houses when comparing rent to mortgage. I look at 2/2 condos, townhouses. Like I said before, UTC/La Jolla, Mira Mesa are a good gauge because that’s where tech worker settle when they enter San Diego. Then after a couple years, they look to buy. I like to look at new construction prices for comparison.

My intuition says that if someone is paying $2,200 rent for a townhouse in UTC, they’d be willing to pay $3,500 to buy a much larger house at 4S, assuming they have the income, of course.

[The-Shoveler]

L.A. and North County SD is a little easier for me to relate to (I don’t really hang in South SD).

but when you look at places like San Gabriel, Arcadia, (A lot of other areas in L.A. that are getting too numerous to keep track of these days) even Riverside next to UCRS.

There is no way the home prices reflect local incomes.

paradise tax, was not here 20 years ago but it is here now LOL.

[FlyerInHi]

That’s why you don’t compare house prices to income, but to prevailing rent… Not at the very high end, but at the median.

NYC has always been a place where people have high tolerance for higher monthly payments.. It’s getting more so for the coastal cities of Cali.

For San Gabriel, Arcadia, and the UC areas, it has to do with Chinese immigration. They are bringing in cash for large downpayments so their monthly housing expenses aren’t that much.

As long as we have incremental sales, and low inventory, we will have prices creeping higher.

Another thing, I believe that tech workers are more serious types. They are better paid and are good savers from a young age. By age 30, they could have a good downpayment. If you have a sizeable downpayment (from savings or family), you can buy more, making the monthly payment more manageable.

Of course, historically low interest rates are making the buying proposition more palatable.

[UCGal]

[quote=FlyerInHi]
What if Lenovo mismanages Motorola and the company goes out of business.. What if Qualcomm falters? What if Whatsapp becomes write-off for Facebook, causing venture capital to run scared? Not saying that would happen, but nothing is forever.
[/quote]

Lenovo/MotMobility would have ZERO impact on San Diego. MotMob laid off or transferred the last of the cell phone group more than a year ago. The remaining group (cable) was sold to ARRIS last spring. There’s no significant Motorola/Lenovo presence in San Diego.

It might impact the bay area – and would definitely impact Chicago, though.

[The-Shoveler]

Buying a primary was always an expensive proposition that did not seem to make sense in the short term.

Only lately has it seemed more reasonable compared to rents (well at least coming from L.A.).

Very few people I have ever known who sold their primary and waited very long to buy back (2005-2009 being an extreme aberration), have ever told me it was not the worse decision they ever made.
(I should have said most have told me it was the worse decision they ever made)

That’s coming from an Old Guy.

Anyway I think we are getting way off topic.

I would wager, ten years from now most who did buy in 2005-6 at the peak will not feel unhappy about it.

[joec]

[quote=FlyerInHi]
BTW, I don’t look at high end houses when comparing rent to mortgage. I look at 2/2 condos, townhouses. Like I said before, UTC/La Jolla, Mira Mesa are a good gauge because that’s where tech worker settle when they enter San Diego. Then after a couple years, they look to buy. I like to look at new construction prices for comparison.

My intuition says that if someone is paying $2,200 rent for a townhouse in UTC, they’d be willing to pay $3,500 to buy a much larger house at 4S, assuming they have the income, of course.[/quote]

Exactly…A house price is just a number and people are more interested in their monthly nut compared to what they have to pay in rent…

As I mentioned in another post, if your income is half decent and I assume anyone buying now MUST have decent income, that 3500 mortgage becomes about the same as the rental after the tax deduction so it’s easy for them to buy since the rent is the same and they’d rather live with more space, “better” schools, more “families” and “neighborhood”, etc…

In regards to these expensive (1 mil+) houses, as mentioned and what I’ve witnessed firsthand from many people known/met in my limited circle (asian/chinese mostly) has had family money help them buy. This is in Bay Area, LA, SD, etc…Talking about 1-1.5 mil places that their income would be impossible to support. Of course, not everyone has that help, but enough do based on the available inventory. Asians also “love” real estate and trust it more than, say stocks/bonds, etc…

I can count on my 1 hand how many people didn’t have help.

Oh, lastly, just from all the divergent view points even here, I will say again that the MID isn’t going away anytime soon…

[FlyerInHi]

[quote=The-Shoveler]
I would wager, ten years from now most who did buy in 2005-6 at the peak will not feel unhappy about it.[/quote]

Happiness is in the eyes of the beholder. But 20 years to find happiness, if they are still around. They are sure not the types to read Piggington.

The “benchmark” 2/2 I’m tracking was in the high $400s at the peak, It’s selling now in the high $300s. Still some way to go in nominal terms and may never be reached in real terms.

[FlyerInHi]

Joec, what you say makes sense to me.

If a buyer’s family has a large downpayment to buy a house then why not? Especially if you want to be in the best school district where there are few rentals. The principal is still there and you’re paying the same as rent, so why not enjoy the larger, more comfortable house. Money in the bank is not earning much.

I think that’s it’s not just Asians, but more recent immigrants have higher tolerance for higher housing monthly outlay. In Asia, Europe and even in Latin America, people live in smaller houses. Even San Diego houses seem cheap compared back in the home country.

Plus, here we have pretty well developed housing finance which makes the buying process easier.

One of my friends is from China. Her parents have her $300k to buy a $600k place. She has a more enjoyable house than rent and the parents get a vacation home whenever they feel like visiting. The nieces and nephews also have a place to stay when they come for school.

[CA renter]

[quote=flu]

Wait.

1. First of all, I thought flippers traditionally are cash buyers, no? At least they have to be if we’re talking foreclosures….

2. Even if they were to take out a loan, it wouldn’t be reported as mortgage interest deduction on schedule A. Again it would be investment interest expense on schedule E.

3. Flippers that take out a loan to flip a specific property isn’t paying *that* much interest anyway if the flip is really a flip. Maybe 1-3 months?

4. And I have a question. How can you tell a flipper from a non flipper/investor?

Seems to me you’re just asking for arbitrary restrictions on investments and or speculation…

So let me get this straight.. You’re suggesting that someone that speculates and earns money should be taxed for income. But someone that speculates and loses money should eat the costs…

How is this different from the reverse of this scenaro: a bank that earns money keeps the profits, but a bank that takes heavy losses, the government and taxpayer ends up picking up for the loss (sound familiar)?

And let’s take this one step further. Why stop at just flipping houses? Why not make this rule apply to all investments, including money you put into bonds, stocks, mutual funds, everything…

Everytime you earn a profit, you pay taxes on it. Every time you lose money, you can’t use it to offset your gain… That would also “discourage” speculation, (as well as sound investing) would it? When was the last time you lost money on a bad debt or bad investment? Did you write it off or not? Or have you had a perfect track record of never losing any money on any of your investments?

Seems to me, in the suggestion you are making, it’s government wins if you profit, government wins if you lose.

Uh, ok… I’m glad you’re not a politician and I’m glad this idea is not very popular…[/quote]

No, not all flippers are cash buyers. Even those who appear to be cash buyers are often leveraged; some use money from other RE (mortgaged after purchase), some pool funds that come from the other investors’ houses or are borrowed/collateralized in some other way.

Of course, I’m talking about people who are borrowing in order to flip. And as SK noted, flippers are supposed to add any mortgage/loan interest to their cost basis upon sale.

What I’m trying to say is that, totally IMO, speculators and investors (not just flippers) should not be allowed to “invest” in basic necessities or finite natural resources (that are in high demand) and, at the very least, our tax code should not encourage this. I’m not concerned about what they lose, as they shouldn’t be allowed to speculate/invest in high-demand finite natural resources at all, IMO.

We certainly shouldn’t be loaning govt-backed money to these investors, either.

Stocks, bonds, etc. are different because nobody *needs* these things in order to survive, and their are not finite natural resources. This is why I have no problem with people investing in these assets. It’s the commodities and real estate markets that end up creating real problems because of the finite nature of these assets, and the fact that they are basic necessities for survival (see my note above about rentier capitalism and feudal societies before saying that people can rent instead of buy).

[Author]

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