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Buy vs Rent
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PostPosted: Thu Aug 09, 2007 1:24 pm GMT    Post subject: Buy vs Rent Reply with quote

Perhaps this belongs in a different form (admin, please correct me if it does):

http://www.mediafire.com/?40mbzn96isl

I've created a buy vs. rent calculator, similar to the one on the new york times website. IMHO, it's superior in that it takes the value of the standard deduction into account.

Suggestions for improvements welcome. I think I got everything right, but please check my math!
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admin
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Joined: 14 Jul 2005
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Location: Greater Boston

PostPosted: Thu Aug 09, 2007 1:41 pm GMT    Post subject: Re: Buy vs Rent Reply with quote

Anonymous wrote:
Perhaps this belongs in a different form (admin, please correct me if it does)


This is the right one, thanks.

- admin
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PostPosted: Fri Aug 24, 2007 1:27 pm GMT    Post subject: A couple suggestions Reply with quote

You missed a couple things with respect to taxes.

First, property taxes are itemizable deductions along with interest and so are state and local income taxes. For a person in Massachusetts the 5.3% income tax is likely to soak up a large percentage of the standard deduction. Thus, the majority of the interest and real estate taxes can be looked at as fully deductible.

Second, it appears that you made rent tax decutible. It is not. You get a tax credit in Mass but no tax deduction at the federal level. I am not sure about renter's insurance but I don't think you get to deduct that either.

Making these two changes makes a big difference. I put together a very comprehensive spreadsheet for my own personal situation that even went so far as to consider the loss of the Mass. rental credit each year. You don't need to go that far but getting the tax treatment right is critical.

A final point is risk. By buying, you remove the risk of rental market increases. By renting, you remove the risk of the property market fluctuations. You also don't have the pain of selling (or pressure put to stay in one location) but also lack the right or incentive to really improve the place you are living and invest in nice furniture, applicance, etc... These intangible tradeoffs are pretty important IMHO. But so are the taxes....
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SamChady
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PostPosted: Tue Aug 28, 2007 2:59 am GMT    Post subject: Home Office Deduction in the Buy v. Rent Arguement Reply with quote

One thing that I have not seen is how the IRS encourages work at home types to rent. The home office deduction for renting is HUGE in comparison to owning.

If you rent, you just deduct the square footage of your apartment that you use for the office, and that percentage of the rent, utilities, etc., is 100% deductable.

If you own, you still get the percentage of the utilities, condo fee, etc., which is 100% deductible, but now you have to depreciate the percentage of your home used for the office.

What is the difference you ask? When you finally sell your home, you have to pay capital gains on the part of your home used for a home office! For some people, they give back nearly all of the deduction that they paid previously.

You might say, so what, you pushed taxes into the future, and with the time value of money you'll be ahead right?

Wrong. If your home goes up in value significantly, then you might have to pay MORE. If your home stays the same, you're all set (at least with taxes) and if it goes down, you can't take a capital loss (unless the property is commercial which it would not be as a home office).

So basically, if you rent, a huge amount can be saved. If you own, its a pain that costs you extra accounting fees to do, and in the end, you only profit if you never sell or your home does not go up in value.

A friend of mine just bought a condo in NYC, but he rents an office in the same building. In this way, he can get his deduction fully.
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PostPosted: Sun Sep 16, 2007 3:29 am GMT    Post subject: Re: A couple suggestions Reply with quote

Anonymous wrote:
You missed a couple things with respect to taxes.


Thanks for the feedback; you're absolutely right about the deductability of state income taxes - I will have to update my spreadsheet.

As for the second point (rent expense not being deductible): Although rent expense is not deductible, one can think of the standard deduction as being applied towards rent. It's a bit of mental accounting that's factored into my spreadsheet. It can also be applied towards principal payments (for the amount that differs between interest/taxes expense and the standard deduction). You'll see that in my calculation for deductible expenses on both buying and renting.
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PostPosted: Sun Sep 16, 2007 2:31 pm GMT    Post subject: Rent Deduction Reply with quote

While one could think of rent as being applied towards the standard deduction I don't think this is really the best approach. The best approach is just to take the standard deduction as a given, regardless or whether you rent, own, or live rent-free. Because interest payments and RE taxes are in fact tax deductible (and rent isn't), I think it is easist and most correct to focus solely on the impact of those deductions. Doing so requires ascertaining how much "extra" deductions one gets as a result of owning a home. While some people might have an excess of other deductions, getting to the full ammount without factoring in home expenses may be a challenge for most people.

A simplified example. Say the standard deduction is $10K and you pay $9 in state income taxes and a total of $11K in interest and property tax. In this case you utilize $10K of the deductions. At a tax rate of 36% this reduces the after tax cost of owning your home on a annual basis by $3,600, or the equivalent of $300 a month. Thus, renting a property for $2,000 is equivalent to you in economic terms as owning a property where you pay $2,300 a month in interest, RE taxes, extra utilities, and HOA fees (if any). If you can get away with paying only $2,200 then I would say owning is cheaper than renting, even though it seems more expensive in simple terms especially if one throws in an extra $300 or so in principal payments...
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john p



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PostPosted: Sun Sep 16, 2007 3:08 pm GMT    Post subject: Reply with quote

I can't stand people that can say something in a paragraph that takes me ten pages.

I think your analysis speaks to a period of time. Moving forward as rents increase and your mortgage payment relatively stays the same. You have to admit that buying is a better long term strategy right? I mean are you going to rent forever?

Is what you're saying wait for prices to align with the $2,000 rent $2,300 buy. How long? Doesn't time enter the equation? Think about the last 5 years before your retirement. If you're done with your note in your fifties, you can retire earlier and have more money to save. If you wait 5 years to have kids, college tuitions might go up 5 years of increases etc. To what sense do we think about the candle on both ends?

I log on to this site almost every day to hear from folks like you. Could you please explain some of the basis you would use to think about this stuff in the course of your life (over time)?
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admin
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PostPosted: Sun Sep 16, 2007 4:04 pm GMT    Post subject: Reply with quote

Hold on a second...

Rent is deductible in Massachusetts. Check out TY2006 MA Form 1, Line 14. Of course, this benefit is decreased if you itemize deductions on your federal taxes since it lowers your Massachusetts taxes and therefore your federal deduction. Also, the maximum rental deduction in 2006 was $3,000, so at most this would have saved you $159 on your most recent taxes.

Also, your federal deductions, including the mortgage interest deduction, are limited once your income exceeds $150,500. See TY 2006 Schedule A, Line 28. That may seem like a lot, but frankly, working backwards from housing prices in the area and the standard formula for what is affordable, high incomes shouldn't be unusual at all. So if your income is on the high end, the mortgage interest deduction is limited, and if it is on the low end to the middle, its benefit is also limited since you would otherwise be taking the standard deduction. There is only a sweet spot in the middle where you get the full benefit. It's probably best to buy some tax software and play around with the numbers yourself to get a good estimate of how much the mortgage interest deduction could save you personally over the standard deduction.

Disclaimer: I am not a tax expert, so check everything I have said against actual tax forms and instructions.

- admin
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PostPosted: Sun Sep 16, 2007 4:14 pm GMT    Post subject: Re: A couple suggestions Reply with quote

Anonymous wrote:
one can think of the standard deduction as being applied towards rent.

I misspoke here - what I meant to say was: one can think of the standard deduction as being applied towards housing. That is, you either get interest deduction (if you own and interest/property tax expense is less than standard deduction) or standard deduction (if you rent).

This is not an iron-clad rule, but it's helpful to think of this manner.
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PostPosted: Sun Sep 16, 2007 4:16 pm GMT    Post subject: Re: A couple suggestions Reply with quote

Anonymous wrote:
That is, you either get interest deduction (if you own and interest/property tax expense is less than standard deduction) or standard deduction (if you rent).


Again, my mistake: you get interest deduction if interest/property tax expense is greater than standard deduction.
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john p



Joined: 10 Mar 2006
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PostPosted: Sun Sep 16, 2007 5:37 pm GMT    Post subject: Reply with quote

If you guys want to talk about taxes think about what you might do with the extra cash you get by renting versus buying. If you take that money and invest it right, what are the tax implications of that? What assumptions do you base your models i.e. growth of stocks versus decline in housing price? Don't you need to weight the P/E bubble of the stock market with the overpriced housing bubble? Do you think it is realistic to expect that financial investments could go up and house prices go down? If so, how much. Think about it, the perfect scenario for a first time buyer is that they save the $20k per year savings of rent versus buy and then their savings grows through the roof. Is it realistic to think that the stocks could go through the roof and the housing go down at the same time? People will have more in their 401k's to yank out for down payments. This price bump in the high end at the beginning of the year had to do with the market bubble in the second part of last year.

http://finance.myway.com/jsp/ct/bigchart.jsp

I think this tidal in and out of the water level affects both sides of the equation and you can't cherry pick assumptions (they need to align with a realistic contextural configuration). If it is not a tidal rhythm and it is like a 100 year storm (an anomoly) aren't all markets affected by this 100 year storm? If we get a crash everyone is in trouble. What remedies does the economy have to absorb this storm? Just as you'd like all the stars align for you, the banks do too. They carry more weight. However, they too need to make concessions if the economic impacts create a broad problem. New buyers are too small of a segment to have any political clout. Instead, think of it as first time buyers are the only ones that can buy many of the foreclosed properties or from the desperate sellers. I would be trying to time the optimum time to captialize on that. I do think that it will be affected by the yearly buying cycles i.e. spring selling peak and slower seasons. I would align the two, that would be my strategy.
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PostPosted: Sun Sep 16, 2007 6:33 pm GMT    Post subject: Reply with quote

Quote:

Do you think it is realistic to expect that financial investments could go up and house prices go down? If so, how much. Think about it, the perfect scenario for a first time buyer is that they save the $20k per year savings of rent versus buy and then their savings grows through the roof. Is it realistic to think that the stocks could go through the roof and the housing go down at the same time?


That's probably not something to count on. If you are looking to buy a home with a <= 5 year time horizon, why risk it at all? The bulk of the growth in your down payment is going to come from your additional savings anyway, so why gamble on other assets which, as you point out, are likely to be sink with the tide as well? My point is, you could park your down payment in something safe like CDs and avoid being hit by the broader tide, without much of a downside. (I think the potential downside to that strategy would be hyperinflation, which isn't entirely out of the question, but is hopefully less likely than all asset classes reverting to their mean ratios.)

- admin
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PostPosted: Mon Sep 17, 2007 12:42 am GMT    Post subject: Reply with quote

John, from the p.o.v. of applying one's savings to investments, I think the problem is that there are two types of investors, mainly passive vs highly active.

For the passive ones, most likely, the sideway years of 2002 to 2004 wouldn't have bared any fruits or even worse, buying the NASDAQ index in '99/'00 would have probably killed someone.

On the other foot, an active one could have applied the credit bubble and bear market analysis and have made money throughout the time period using REITs indexes from 2002 to 2004 ['05 was pushing it], buy 'n hold on Gold/Silver starting '02, and finally, an reverse index fund (RYDEX and others) from fall '00 till the evident bottom of the bear market in '03 and then lightly loading up on the S&P500. All and all, that's a solid 10-15% per annum (depending upon how much one keeps in cash vs an investment vehicle). I think just my buy 'n hold on gold alone made 100%, with precious metals being only 15% of the portfolio, which is already a nice overall 3+% annualized over the past five years doing little. In general, I'd kept 40% in cash (basically low yielding 3% CDs [I don't care for high interest S&Ls like Countrywide but real banks] and no munis) during this whole time period while maintaining a 11-12% overall net gain from active intermediate term investing/trading while keeping a significant position in cash.
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john p



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PostPosted: Mon Sep 17, 2007 1:19 am GMT    Post subject: Reply with quote

Would you buy real estate right now or not? If so, on average how much would you offer under a typical asking? Whatever you'd do, why would you do it?
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PostPosted: Wed Sep 19, 2007 2:04 am GMT    Post subject: Response to Admin - Tax Clarification Reply with quote

Yes, rent is deductible to the tune of $159. I mentioned that originally but don't emphasize it because it is indeed a paultry amount.

You mortgage interest deducations are NOT limited once your income exceeds $150K. It MAY be limited. This is called the alternative minimum tax (AMT). Basically, this gradually phases out deductions when people have a whole lot of them. I did the calculations for myself and I'm not even close to hitting the AMT even though I'll be above the threshold and own a home.
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