Author Topic: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?  (Read 716 times)

IWannaGo

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Hello!  I need your insight on all things that go towards getting the most efficiency when it comes to investments and taxes....key question, should I buy a house so I can have the itemized deduction on my taxes as a high income earner?  Currently I have to use the standard deduction :-( ...or maybe someone will tell me that's not a bad thing???  And yes, I count my blessings and have worked very hard to get here.  Like you though, I live way below my means and really look forward to leaving corporate life some day just like MMM himself.

A few things to consider:
  • Housing market where I live (Colorado) is def at the top, meaning I don't see a return/gain in value quickly.
    Calculated what I need to buy in order to exceed the standard deduction in the amount of interest, I have 20% and can afford it.
    Have owned a home 10+ years ago so I know the in's/out's of home ownership, been a renter for years (mo rent is more than what a mortgage would be), single filing, and have no itemized deductions.
    Yes, I can stay put for a few years in a house or turn it into a rental long term if I wanted to move.

I feel like I'm missing something by not having itemized deductions like many people do.  Perhaps there is something else I can do to address this?  Hoping to FIRE in 7 years, perhaps I move to a state with no income tax?

The overall goal....to make the most efficient use of the current income situation with the best balance of investments and tax positioning.

p.s. Yes, I max out the 401K, HSA too, make donations regularly.

dandarc

  • Magnum Stache
  • ******
  • Posts: 2780
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #1 on: September 07, 2017, 08:29:07 AM »
The house you live in is, generally speaking, a lousy investment.  Buying one just for the tax deductions is kind of nuts - lets send $10,000 to the bank / tax collector to save $2,500 on taxes!

What is the price-to-rent you're looking at?  That would help paint a picture of which is likely to be cheaper.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

IWannaGo

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #2 on: September 07, 2017, 08:32:40 AM »
The house you live in is, generally speaking, a lousy investment.  Buying one just for the tax deductions is kind of nuts - lets send $10,000 to the bank / tax collector to save $2,500 on taxes!

What is the price-to-rent you're looking at?  That would help paint a picture of which is likely to be cheaper.

I currently rent at $1,900/mo, and could grab a house between $350-$450K....or find a roommate.  The sooner I can FIRE, the better, and living in a safe neighborhood is key.

Capt j-rod

  • Stubble
  • **
  • Posts: 159
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #3 on: September 07, 2017, 08:34:03 AM »
This is a moving target... My home is almost the weakest part of my portfolio behind the cars... I own my home because it is where I raise my kids and it provides sanctuary. The deduction is kind of a joke compared to all other things. It's like having another kid for the tax credit. They cost way more than the government will reward you. If you want a kid then it is one of the best decisions I ever made. Now back to the deductions... A duplex will give you way more shelter and write offs. If you want a home and the ability to control your future expenses (kind of) then buy one. Traditionally your home is not a great investment, but you have to live somewhere lol!

dandarc

  • Magnum Stache
  • ******
  • Posts: 2780
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #4 on: September 07, 2017, 08:40:54 AM »
The house you live in is, generally speaking, a lousy investment.  Buying one just for the tax deductions is kind of nuts - lets send $10,000 to the bank / tax collector to save $2,500 on taxes!

What is the price-to-rent you're looking at?  That would help paint a picture of which is likely to be cheaper.

I currently rent at $1,900/mo, and could grab a house between $350-$450K....or find a roommate.  The sooner I can FIRE, the better, and living in a safe neighborhood is key.
OK - how much would the houses you are looking at rent for.  $1900 / month rent vs $350K is usually not a property someone would buy to rent-out for cash flow - at that low of a rent vs. the purchase price, you're betting the price and/or rent goes up substantially to make the investment worthwhile.  "Would I buy this house to rent out today" isn't the end-all, but is something to think about - particularly given your specific contingency plan if life takes you away in the near term.

I agree with Capt j-rod - a multi-family where you live in one of the units can make much more sense as an investment.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

IWannaGo

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #5 on: September 07, 2017, 08:43:57 AM »
Capt j-rod, Dandarc,

Noted on the duplex, never considered that vs a house.  Thank you for the perspective, seems to make sense to go that route or find a way to reduce rent and just forget about trying to get to itemized deductions as it's not worth it.

therethere

  • Bristles
  • ***
  • Posts: 434
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #6 on: September 07, 2017, 08:46:43 AM »
I think its a silly idea. Especially with how crazy the Colorado market has been lately. Sure, buy a house to lock in the price or if you want more space. But for deductions? As time goes on the deductions will be less and less due to the loan paydown and eventually will cross under the standard deduction. And if you ever get married and filed joint taxes you'll likely be under the threshold also. The saving money by buying a home to get tax deductions is largely false or misled reasoning.

FYI if you are in Denver suburbs, there are near zero multifamily rentals that are profitable without significant rehab.
I refinanced my student loans with Earnest and cut 1% off my rate. PM me for a referral with $200 credit.

talltexan

  • Pencil Stache
  • ****
  • Posts: 843
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #7 on: September 10, 2017, 01:14:33 PM »
I don't understand how you're maxing out 401(k) and HSA, yet you're still taking standard deduction on your 1040.

IWannaGo

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #8 on: September 10, 2017, 03:38:18 PM »
I don't understand how you're maxing out 401(k) and HSA, yet you're still taking standard deduction on your 1040.

Those adjust my AGI, but I'm not aware I can also take them also as an itemized deduction....what am I missing?  Appreciate any help, the premise of asking about buying a house was to get the most value (balancing having a house, having the deduction to exceed the standard deduction = making my money work in a little more tax advantageous way).

crentist

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #9 on: September 10, 2017, 04:09:47 PM »
What is you income/tax bracket?

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 628
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #10 on: September 10, 2017, 06:36:33 PM »
The house you live in is, generally speaking, a lousy investment.  Buying one just for the tax deductions is kind of nuts - lets send $10,000 to the bank / tax collector to save $2,500 on taxes!

What is the price-to-rent you're looking at?  That would help paint a picture of which is likely to be cheaper.

I currently rent at $1,900/mo, and could grab a house between $350-$450K....or find a roommate.  The sooner I can FIRE, the better, and living in a safe neighborhood is key.

Using those numbers, and my own personal assumptions (2% inflation, 7% investment returns, and 2% housing appreciation) continuing to rent puts more money in your pocket. This calculation includes the tax deduction.

http://michaelbluejay.com/house/rentvsbuy.html



I'd stay where you are.
Passive investing has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

cchrissyy

  • Bristles
  • ***
  • Posts: 400
  • Location: SF Bay Area
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #11 on: September 10, 2017, 08:29:14 PM »
remember even if the itemized deduction with a house is bigger than the standard deduction, well, you would have gotten the standard deduction anyway so only the difference between the two figures is your added benefit from having bought the house.

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1111
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #12 on: September 10, 2017, 09:02:57 PM »
If you are a high wage earner, the mortgage deduction gets phased out (eliminated).
At that point we paid off the mortgage, 3 houses ago. Property tax is deductible, but is not a good reason by itself to buy.

IWannaGo

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #13 on: September 11, 2017, 06:52:23 PM »
The house you live in is, generally speaking, a lousy investment.  Buying one just for the tax deductions is kind of nuts - lets send $10,000 to the bank / tax collector to save $2,500 on taxes!

What is the price-to-rent you're looking at?  That would help paint a picture of which is likely to be cheaper.

I currently rent at $1,900/mo, and could grab a house between $350-$450K....or find a roommate.  The sooner I can FIRE, the better, and living in a safe neighborhood is key.

Using those numbers, and my own personal assumptions (2% inflation, 7% investment returns, and 2% housing appreciation) continuing to rent puts more money in your pocket. This calculation includes the tax deduction.

http://michaelbluejay.com/house/rentvsbuy.html



I'd stay where you are.

Great calculator, helpful to play with the numbers.  Thank you!

IWannaGo

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #14 on: September 11, 2017, 06:53:16 PM »
remember even if the itemized deduction with a house is bigger than the standard deduction, well, you would have gotten the standard deduction anyway so only the difference between the two figures is your added benefit from having bought the house.

Good point, thank you!

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 2788
  • Age: 34
  • Location: Madison Heights, Michigan
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #15 on: September 12, 2017, 12:25:51 PM »
I don't understand how you're maxing out 401(k) and HSA, yet you're still taking standard deduction on your 1040.


I max my 401k, IRA, and FSA and will likely take the standard deduction.  What am I missing? What does one have to do with the other?

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 3830
  • Age: 32
  • Location: Seattle, WA
Re: A House for Deductions...Crazy Thinking? Or is a Different Strategy Needed?
« Reply #16 on: September 12, 2017, 03:12:45 PM »
Definitely consider the impact that itemized deductions would have when you make the rent vs. buy calculation. The higher your tax bracket, the more of a difference these could make. Don't let it be the overriding factor though. Renting can definitely be the better deal even if you let your landlord take those sweet tax deductions.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.