Home ownership

Mr Herbert · Oct 26, 2010

it begs the question why there actually are tax benefits to home ownership? doesnt it just drive up property to compensate? people will spend as much as they can afford to live in the best hosue they can.

its unlikely you are getting people out of the projects with these incentives.

tj100 · Oct 26, 2010

Originally Posted by Mr Herbert

it begs the question why there actually are tax benefits to home ownership? doesnt it just drive up property to compensate? people will spend as much as they can afford to live in the best hosue they can.

its unlikely you are getting people out of the projects with these incentives.

As tax policy, it doesn't make a whole lot of sense, but would be brutally painful to repeal. The stupidity is that the more income you earn, the bigger the tax break. Somebody making $500K with a $1M mortgage at, say 6%, (the biggest that you can claim a deduction for), get's a $21K reduction in their tax bill; somebody making $50K with a $150K mortgage gets just $2,250 off their tax bill. Or, even worse, if the $500K earner had the same $150K mortgage, his tax deduction would be $3,150.

photoguy · Oct 26, 2010

Doesn't deducting interest on a big mortgage seriously increase your risk of triggering the AMT, so that the tax benefits become moot? I routinely trigger AMT just by deducting NY taxes and relatively modest charitable giving.

tj100 · Oct 26, 2010

Originally Posted by photoguy

Doesn't deducting interest on a big mortgage seriously increase your risk of triggering the AMT, so that the tax benefits become moot? I routinely trigger AMT just by deducting NY taxes and relatively modest charitable giving.

Principal residence mortgage interest is deductible under the AMT as well, and I believe (though I'm not a tax professional) is also excluded from adjusted gross income for AMT purposes.

photoguy · Oct 26, 2010

Thanks, I'll look into that. Although in NYC the carrying costs are so high I'm still not sure it is worth it to own...

magogian12345 · Oct 26, 2010

Originally Posted by bmf895

You are not factoring in the tax-deductability of mortgage interest and property taxes. .)

These deductions may not last for many more years.

RSS · Oct 26, 2010

Originally Posted by thekunk07

my mom had to remind me of where i came from today and that buying a house for 1.5 wasn't my birthright.
Where you came from today? If it's today ... aren't you already there?

Piobaire · Oct 26, 2010

Originally Posted by tj100

As tax policy, it doesn't make a whole lot of sense, but would be brutally painful to repeal. The stupidity is that the more income you earn, the bigger the tax break. Somebody making $500K with a $1M mortgage at, say 6%, (the biggest that you can claim a deduction for), get's a $21K reduction in their tax bill; somebody making $50K with a $150K mortgage gets just $2,250 off their tax bill. Or, even worse, if the $500K earner had the same $150K mortgage, his tax deduction would be $3,150.

This is like saying it is stupid that the more income you earn, the more income tax you pay. OTOH, I'm sure the voting public will swallow this bilge without question. This whole, "thinking at the margins" is just fancy talk for greedy rich bastards, right?

tj100 · Oct 26, 2010

Originally Posted by Piobaire

This is like saying it is stupid that the more income you earn, the more income tax you pay.

Actually, it's not. I'm no fan of progressive tax structures, but this is a true perversion in the tax code. If two people each have a $100,000 mortgage at 6%, but one makes $50,000 per year, and the other makes $500,000 per year, the deduction is worth more $1,500 to the guy making $50K, and $2,100 to the guy making $500K.

Assuming that the policy reason for this is to encourage home ownership, it doesn't really make sense to give a bigger break (on the same loan) to people making more money. I just don't understand, from a policy perspective, why anybody thinks this makes sense in the context of a progressive tax system.

Piobaire · Oct 26, 2010

Originally Posted by tj100

Actually, it's not. I'm no fan of progressive tax structures, but this is a true perversion in the tax code. If two people each have a $100,000 mortgage at 6%, but one makes $50,000 per year, and the other makes $500,000 per year, the deduction is worth more $1,500 to the guy making $50K, and $2,100 to the guy making $500K.

Assuming that the policy reason for this is to encourage home ownership, it doesn't really make sense to give a bigger break (on the same loan) to people making more money. I just don't understand, from a policy perspective, why anybody thinks this makes sense in the context of a progressive tax system.

So means testing, etc. for the deductions? Apply increasing marginal taxes but not allow deductions to occur at the margins? I know Obama has made noise about this over charitable deductions, people like Conyers disqualifying homes over X number of square feet, etc. As I said, the public will swallow this bilge without thinking twice.

otc · Oct 26, 2010

You guys screaming "tax benefits" are all wrong...

If he can rent a comparable place for $2k a month that costs 800k to purchase, it just doesn't make sense to buy unless you expect to beat square footage adjusted appreciation averages (and in an already very expensive area with 800k condos...this is less likely than an up and coming place)

The tax deductions do not make up for this gap...especially when you factor in ownership costs since you no longer have a landlord who is going to make repairs and replace appliances. Also, this is a condo not a house so you can probably expect to add some association dues to the mix.

Basically, this guy lives somewhere where the rental market is out of touch with the ownership market and could do much better by investing the differance between rental/mortgage.

tj100 · Oct 26, 2010

Originally Posted by Piobaire

So means testing, etc. for the deductions? Apply increasing marginal taxes but not allow deductions to occur at the margins? I know Obama has made noise about this over charitable deductions, people like Conyers disqualifying homes over X number of square feet, etc. As I said, the public will swallow this bilge without thinking twice.

Depends what you're trying to accomplish with the deduction. Effectively, there is already a proxy means test with the $1M limit on the loan. Assuming that the goal is to encourage middle-class home ownership (for what reason, I'm not sure), you could do a more effective job with a straight-up credit than with a deduction as structured.

I've just always found it silly that my effective post-tax cost of housing goes down every time I get bumped into a new tax bracket. I mean, I'm not complaining, I just don't understand what they're trying to achieve (except, of course, re-election) and how the current structure fits that need.

Piobaire · Oct 26, 2010

Originally Posted by tj100

Depends what you're trying to accomplish with the deduction. Effectively, there is already a proxy means test with the $1M limit on the loan. Assuming that the goal is to encourage middle-class home ownership (for what reason, I'm not sure), you could do a more effective job with a straight-up credit than with a deduction as structured. I've just always found it silly that my effective post-tax cost of housing goes down every time I get bumped into a new tax bracket. I mean, I'm not complaining, I just don't understand what they're trying to achieve (except, of course, re-election) and how the current structure fits that need.
I see what you're saying. Conyer's 3k sq foot limit was of course another proxy for means testing. I think, for once, they just went a simple route and had the deduction scale with the increasing marginal rate of taxation. I think the question of what are the trying to achieve is valid, as well as, is what they're trying to achieve necessarily a net good. OTC, your analysis is correct. There are some "what ifs" there, but given them, you are on the mark.

otc · Oct 26, 2010

Originally Posted by Piobaire

OTC, your analysis is correct. There are some "what ifs" there, but given them, you are on the mark.

Of course your 800k investment could turn out to be wildly successful and you would far outpace the returns you could have other wise gotten on the rent/buy price difference.

The only potential issue is that you are most likely investing a substantial portion of your net worth in a very illiquid asset. Unlike a normal investment, most people don't want to sell their house at the perfect moment (because well...they like living in it)...if you need to cash out, you have to actively find a new place to *live* and move your family and all of your belongings. Add in transaction costs and it starts to look even worse.

Obviously I can think of lots of good reasons to own a home despite it not being the best investment (stability, the ability to remodel as you please, forced equity savings for poor money managers, etc) but when the price differential gets so large, it is hard to justify. I would say that unless you get lucky on the appreciation, 600k vs 2k rental is still a pretty bad deal but the extra benefits of owning a home may outweigh the need to maximize the return on investment.

tj100 · Oct 26, 2010

Originally Posted by otc

Obviously I can think of lots of good reasons to own a home despite it not being the best investment (stability, the ability to remodel as you please, forced equity savings for poor money managers, etc) but when the price differential gets so large, it is hard to justify. I would say that unless you get lucky on the appreciation, 600k vs 2k rental is still a pretty bad deal but the extra benefits of owning a home may outweigh the need to maximize the return on investment.

It really depends on your time horizon as well. If you're thinking about staying in a place for a couple of years, the risks of having so much equity in such an illiquid investment are huge. But if you're looking at 'the' house where you'll spend 20+ years, you've got inflation on your side. With the mortgage, you've got fixed payments and you're still paying $3K a month - but your rent has gone up to $3,350 (if we experience the same inflation rate over the next 20 years that we did over the previous 20 years).

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