Tax benefits of owning?

irvinehomeowner

irvinehomeowner

Well-known member
Okay, so I've brought this up on occasion at the IHB and now that it's tax season, I would really like someone who knows to explain to me how having a mortgage isn't really helpful when it comes to tax write-offs.

When I see those rental parity equations (if you recall I wrote Version 1 of the RentToOwnulator?), I always questioned how much impact should the mortgage and property tax deductions have.

One of the common answers I get is "AMT will render those ineffective". To this day, I still don't understand how AMT works and who it actually affects. I have yet to see AMT affect us and I do think we are in the income bracket it should affect.

This year, the tax bill hit us hard. Previous years, the mortgage write-off always evened out our taxes so we either paid very little or got a refund. Granted, our income has risen every year but I really do think that the tax benefits of owning are understated, especially on the IHB. It would seem that many of the bulls in regards to this are renters and have not actually witnessed for themselves how much it helps... but I firmly believe it does.

And in the end, many peope like my SO puts its, "I would rather put money into mortgage interest that reduces my taxes and is towards a home than rent from someone else and have to pay the government that money I saved".

So what am I missing here? Can someone explain AMT to me in caveman terms  so I can understand why it makes the tax benefits not so... uh... beneficial?

I wish awgee was here.

EDIT: Typos.
 
Im a CPA and cant explain how the AMT works, luckily for me i use turbotax and it just walks me through everything. What i do know is that the AMT is another way of calculating your tax, the A in AMT = Alternative, Turbotax told me that about 3K of our total tax liability was due to the AMT.  I was playing around with Turbotax and entered about 30K in interest a year (this equates to a loan of about 600K and a purchase price of 750K, with 20% down) and due to our income we dont actually get any benefit from a property tax deduction. So buying a property with mello-roos is even worse for us relative to those who deduct it along with their property taxes.  However, the 30K interest deduction would have reduced our tax liability (both Fed/CA combined) by 13K, which means the tax benefit of that 30K deduction is 43% (13K/30K).

In terms of our overall cash flow, for about an extra $1000 out of our pocket compared to our current cash flow we can be buy a 750K, 3000 sq foot house in Serrano Heights compared to our 1500 sq foot house rental in irvinne. Some would say that it clearly makes sense for us to buy a home since for an extra 1K we could be in 3000 sq ft. But then im just in a situation where not only will i have the benefit of owning a depreciating asset, but also save 1K less a month than we do now.

Im pretty sure i didnt answer your question, but thought i would chime in with a specific example of how taxes impact us.
 
This is what i always tell people about tax deductions because everyone thinks they are such a great idea. You have to spend a $1 to save $0.30 to $0.40 in taxes. Last time i checked, doing just that didnt make sense to me.

To the extent you are going to do something anyways (donations, buy a home, take clients on business for those of you that are self employed) that tax deduction is just the cherry on top.
 
I understand the $1 to save 0.30-0.40... but even the IHB Calc defaults to 0.25 which is too low to me (considering it is Irvine and income and home prices will be higher putting people in higher tax brackets).

The thing is, if you rent for $3000 a month, and your mortgage+taxes+misc is $4000 a month but you save $1000 in tax writeoff, doesn't it become a no-brainer? Even if it's an extra $200-500 a month? The rationale being that would you rather pay a bank $1500 in interest or the government $1000 in taxes?

So the AMT took away your property tax deduction but not your mortgage interest? Interesting. I've been Googling around and I think I understand AMT (TurboTax has a good write-up on where to find it and how to work around it) but I don't know if it really kills as much of the tax benefit as people say it will. It's just like how the NAR says "Buy now before the credits run out or interest rates go up"... the perma-bulls are saying "Tax write-offs are not that significant because of AMT". Someone who doesn't know (even CPAs) can't really confirm if it affects them or not (and I do think in most cases it may not... but WHYEMEMVEE).
 
irvinehomeowner said:
I understand the $1 to save 0.30-0.40... but even the IHB Calc defaults to 0.25 which is too low to me (considering it is Irvine and income and home prices will be higher putting people in higher tax brackets).

The thing is, if you rent for $3000 a month, and your mortgage+taxes+misc is $4000 a month but you save $1000 in tax writeoff, doesn't it become a no-brainer? Even if it's an extra $200-500 a month? The rationale being that would you rather pay a bank $1500 in interest or the government $1000 in taxes?

So the AMT took away your property tax deduction but not your mortgage interest? Interesting. I've been Googling around and I think I understand AMT (TurboTax has a good write-up on where to find it and how to work around it) but I don't know if it really kills as much of the tax benefit as people say it will. It's just like how the NAR says "Buy now before the credits run out or interest rates go up"... the perma-bulls are saying "Tax write-offs are not that significant because of AMT". Someone who doesn't know (even CPAs) can't really confirm if it affects them or not (and I do think in most cases it may not... but WHYEMEMVEE).
Click to expand...

Yeah the IHB defaults to 25%, it really depends on your marginal tax brackets (we are in the 33% bracket for federal and 9.3% for CA), so at a minimum I would use 33% in any calculation (assuming you have enough income that even after the deduction you are still in the same tax bracket). Higher income people get a higher benefit, i think IR just does 25% to be on the safe side.

That is correct, there was no benefit when i put in 7,500 for a property tax deduction (not sure if that is the AMT or a phase out based on income), but either way i would not have received a tax benefit from a property tax deduction. I did get the full benefit of the interest deduction.

I think in your numerical example most people would consider that to be a no brainer and would purchase a home.

 
Here is the link to the TurboTax site detailing how AMT works and suggestions:
http://turbotax.intuit.com/tax-tools/tax-tips/irs-tax-return/5855.html

It's pretty good as I was able to find information on how it's calculated in Form 6251. We really need a more simplified tax system... all ours does is give the people who have the resources the advantage to game the system. The more I read, the more it really becomes a burden for the middle class... people who don't make money don't get taxed, people who make lots of money can afford to find ways not to get taxed... so who ends up paying the most in taxes? Grrrrr.

EDIT: Typos and clarification.
 
When I look at analyzing the benefits of ownership versus renting I go one step further an strip out the equity repayment portion of the mortgage payment.  The equity repayment portion using a 5% 30-fixed loan is approx. 20% of the mortgage payment in the first few years.  I like to compare interest payment + property taxes + insurance + HOA (if any) - tax benefit vs. the monthly rent amount.  Rule of thumb is that in most parts of OC a price/sf of around $250/sf will put you close rental parity (this figure goes down as Mello Roos and HOA increase) using a 5% mortgage rate.
 
usctrojancpa said:
When I look at analyzing the benefits of ownership versus renting I go one step further an strip out the equity repayment portion of the mortgage payment.  The equity repayment portion using a 5% 30-fixed loan is approx. 20% of the mortgage payment in the first few years.  I like to compare interest payment + property taxes + insurance + HOA (if any) - tax benefit vs. the monthly rent amount.  Rule of thumb is that in most parts of OC a price/sf of around $250/sf will put you close rental parity (this figure goes down as Mello Roos and HOA increase) using a 5% mortgage rate.
Click to expand...

that is how IRs rent calculator is set up.  I remember seeing an old ad from the 90s on the IHB forums where the gross house payment was cheaper than rent even before the tax benefit. We probably wont see those days again.
 
I tend not to strip out equity portion. Neither do i add the income lost due to down payment through investment. Both these numbers are really subjective. if prices drop dramatically you don't build equity. At the same time the downpayment money outside may or may not earn any money. depends on the kind of investment. In the last 10 years tracking stock market would probably get you 2% before tax.

I think at about 275/sq ft the place in woodbury east are sure rental parity even with mello roos and HOA. at the 300 per sq ft it is slightly higher but not too far.

usctrojancpa said:
When I look at analyzing the benefits of ownership versus renting I go one step further an strip out the equity repayment portion of the mortgage payment.  The equity repayment portion using a 5% 30-fixed loan is approx. 20% of the mortgage payment in the first few years.  I like to compare interest payment + property taxes + insurance + HOA (if any) - tax benefit vs. the monthly rent amount.  Rule of thumb is that in most parts of OC a price/sf of around $250/sf will put you close rental parity (this figure goes down as Mello Roos and HOA increase) using a 5% mortgage rate.
Click to expand...
 
qwerty said:
usctrojancpa said:
When I look at analyzing the benefits of ownership versus renting I go one step further an strip out the equity repayment portion of the mortgage payment.  The equity repayment portion using a 5% 30-fixed loan is approx. 20% of the mortgage payment in the first few years.  I like to compare interest payment + property taxes + insurance + HOA (if any) - tax benefit vs. the monthly rent amount.  Rule of thumb is that in most parts of OC a price/sf of around $250/sf will put you close rental parity (this figure goes down as Mello Roos and HOA increase) using a 5% mortgage rate.
Click to expand...

that is how IRs rent calculator is set up.  I remember seeing an old ad from the 90s on the IHB forums where the gross house payment was cheaper than rent even before the tax benefit. We probably wont see those days again.
Click to expand...
Yeah, we may never see those times here in Orange County.  Too bad we were poor with no money and low incomes back in the mid-late 90s because that would have been the perfect time to load up on real estate.
 
it would interesting to see someone run some scenarios through turbotax (unfortunately i don't have it).

say:  75k rent v own a 400k house, 100k rent v own a 500k house, etc

just assuming the std deduction for the renter, and state income tax/prop tax/interest for the owner''

 
There has to be some online tax thing that can figure that out because to do it in TurboTax requires tons if information that I'm too lazy to enter.
 
freedomcm said:
it would interesting to see someone run some scenarios through turbotax (unfortunately i don't have it).

say:  75k rent v own a 400k house, 100k rent v own a 500k house, etc

just assuming the std deduction for the renter, and state income tax/prop tax/interest for the owner''
Click to expand...

Just like IHO im too lazy to do this, however, you can create an online account (turbotax.com) for free and enter in all the info you want. It will give you your tax liability or refund - it just wont let you see the actual return until you file, which is when you pay. So you can get the answers to your scenario if you really want them.
 
So I used the IRS online calculator:http://www.irs.gov/individuals/page/0,,id=14806,00.html

And these are the numbers I came up with for Head of Household (no dependents):

75k, 400k house (20% down for 300k loan, 1% prop tax 5% loan)
Rent: $10,191
Own: $7,316
Yearly Interest: $15,892

100k, 500k house (20% down for 400k loan, 1% prop tax 5% loan)
Rent: $16,841
Own: $12,716
Yearly Interest: $19,865

EDIT: 400k loan is 5% not 4%
 
Interesting!

so as long as the rent is equal to the PITI, the tax savings will pay for your MR or HOA (unless you are in Woodbury).
 
how long did it take you to hear back about your 1040X form?  I sent this in when I closed escrow last month, but haven't heard anything yet....
 
scubasteve said:
how long did it take you to hear back about your 1040X form?  I sent this in when I closed escrow last month, but haven't heard anything yet....
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I heard it takes about 10-12 weeks to get your money from my buyers who closed earlier this year.
 
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