Monday, February 2, 2009

Why being an owner still can be a good deal during the real estate crisis?

By Sidney Perez

If you think about paying fewer taxes, it is still a “good deal” to be owner of an house because you can deduce all the cash spent for it from your taxable revenue.
For example, consider two different tax payers: each in the 25 percent marginal tax bracket. Assume that the first one is a renter and the second one is the homeowner. Both have identical annual housing expenditures of $ 12,000 per year. The renter cannot deduct any of this whereas the homeowner can deduct all the mortgage interest and property taxes. Let’s say that this amount is $10,000, a tax saving will be then $2,500 for the homeowner while the renter pays $12,000 without benefiting from any tax reductions.

So, let’s save the economy by buying houses financed in part by tax reductions!

More than earning “free cash”(the $2.500) every year, you should also expect that the price of your house will raise in the future (prices decreased so much that they cannot decrease a lot anymore).

Unfortunately, it is not as easy as it seems...
Firstly, you need to have a very good financial situation to buy and take care of a house because the banks are not likely to lend a lot of money to you if you have just lost your job (in this case you are condemned to be a renter).
Moreover, if you do not pay a lot of taxes or you have already used the maximum amount of cash you can deduce, it is worthless buying a new house.
Just to remind you there is what the IRS call a AMT “Alternative Minimum Tax” which is a minimum tax you have to pay even if you can justify legal deductions which should allow you to pay less tax. So, be very careful about this opportunity, it can allow you save and create free cash but not as easily as it seems.


1)Personal Finance by Vickie Bajtelsmit (chapter 4)



No comments:

Post a Comment