Author Topic: Buying a house? Is the tax deduction worthwhile?  (Read 7363 times)

The Pigeon

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Buying a house? Is the tax deduction worthwhile?
« on: April 18, 2015, 01:17:35 PM »
Hi all,

I've wanted to buy a house for years, but with today's prices (SF Bay Area), that desire has diminished to nothing. I've believe that buying at $450+/sq foot would be stupid.
I just found out that my absolute dream house is back on the market. (I saw it 4-5 years ago when it was on the market (at $95k less than today's asking) and have mooned over it ever since).

I rent a small cottage (no shared walls!) for $1300/mo. In the mustachian view, I'm certain that staying in the rental and letting my 'Stache grow would be much more advantageous than tripling my housing/living expenses. However, my 'Stache creates a big tax burden, and, as a single renter with no kids, I haven't a thing to give me a break, aside from maxing my 401k, which goes away next year when I intend to hit the FIRE button.

Is there enough advantage to owning property to diminish taxes/have a permanent place to live to offset the current cheap housing I'm in? I've never owned a house, and *some* of my friends really encourage me to own property to help offset my tax bill, as well as guaranteeing that my housing expense will stay constant for the next 30 years.

Other things I read, though, make me think I'm in the catbird seat as a renter with less than  $1500/mo in house/utils expenses, no maintenance headaches, and the freedom to do as I please on the weekends (as opposed to living at Home Depot).

The house in question is listed for $775. It will go for $850-900k. This would be 1/3 of my 'Stache. Ouch. It might impact my FIRE date. It would certainly impact some of my wilder post-FIRE ideas (such as staying several months in other locations, RVing about the US). But, it's the most awesome house I've ever seen, and I'd be so happy waking up there every day. It's THE ONE HOUSE. (my precious!)

Anyway, maybe not enough data here for proper opinions, but I thought I'd throw it out there. I wouldn't even consider it for any other house. But this one... oh, this one...

:-/
-pigeon wanna fly to new home?

historienne

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #1 on: April 18, 2015, 01:44:22 PM »
Don't let the pigeon buy the house!

Seriously, this sounds like a terrible financial move, which I think you realize already.  You spend $15,600 a year on rent right now.  At the 4% safe withdrawal rate, $850,000 is equal to $34,000 per year in income.  So you are coming out way behind, even before you factor in maintenance, property tax, or any other expenses of home ownership.

Also, you are talking about the tax benefits, but it sounds like you would be planning to pay cash for the house (and realistically, you might have to, given the state of the bay area property market).  So you wouldn't benefit from the mortgage interest tax deduction anyway.

If you do plan on getting a mortgage, the numbers will be different, but I find it hard to see a way that this purchase is not going to lose you money.

Only reason I see to buy is if this house is larger, and you know that you will need a larger house soonish (ie, you plan on having a family, your parents are going to need to live with you, etc).  In that case, you'd be comparing the house to renting a larger house/apartment rather than to your current rental, and the numbers might be closer.

waltworks

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #2 on: April 18, 2015, 01:46:35 PM »
You have ~$2.5 mil and you're not *already* FIRE?

Shit, buy the house if you want. You are still completely golden to do whatever the heck you want.

Financially it's awful as compared to renting. Presumably your income will be pretty low when RE, so tax advantages aren't super relevant.

-W

Bob W

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #3 on: April 18, 2015, 01:52:41 PM »
No.   You don't own homes they own you.

Embok

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #4 on: April 18, 2015, 01:56:59 PM »
Not the standard Mustachian response, but for us (2 professionals, one kid, one MIL living with us) it made great sense to buy a house even though we live in So Cal, a high COL area.  The interest deduction helped us save money;  the ability to have a lot of space in a safe area allowed us to care for our old person and our newer person during a 10 - 15 year period.  Now that the child is in college and the MIL has passed on, we are looking to downsize, but we have enjoyed the big house lifestyle and the virtually only tax break we could get (mortgage interest deduction), and on balance it has not been a bad deal.  Ultimately, since it seems you can afford the dream home, you need to think about the non-money reasons that you might like it or might not, then decide.

MDM

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #5 on: April 18, 2015, 02:07:54 PM »
It will go for $850-900k.
Assume $850K.  With 20% down, a $680K mortgage at 3.75% for 30 years means $3,149/mo.  The first year's interest would be $25,287.  Property taxes = ____?

At best (e.g., assuming your state income tax is already more than your standard deduction) you will save your marginal tax rate times the sum of (interest + property taxes).

So, compared with $1300/mo, the house will cost you much more and the idea of tax deduction "savings" is illusory.  Up to you to decide, however, if it is worth it - maybe it would be, maybe not....

JoeP

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #6 on: April 18, 2015, 02:25:19 PM »
There are many factors that should go into making a decision regarding home ownership:
  • What will you pay in property taxes yearly?
  • Will the home need repairs?
  • What will be the yearly maintenance cost? I.E., painting, mowing, water bill, etc.
  • What is the opportunity cost you are trading in to purchase the home?
I could go on.  As someone who has had to deal with the cost of home ownership, I find no overriding advantage to owning a home. You are just trading rent for home maintenance/tax/mortgage payments.   I only think a home purchase is a wise move if your yearly cost is the same or less than paying rent. Or if it's an income producing property that nets you a profit after deducting the cost of maintenance, taxes, repairs, etc.

Take the time to do the math so you can be completely aware of the financial commitment you are undertaking.  I have friends and family who have purchased homes and regret it - they are barely treading water because they never factored in all the potential expenses of home ownership.

If you do buy a home don't be afraid to get some good roommates that pay you rent - it's a good way to ameliorate the cost.

Bicycle_B

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #7 on: April 18, 2015, 03:29:30 PM »
Obviously, a personal decision.

If your stash is $2.5M, you can use all your capital for investments, have $100K income forever less income taxes, and rent or travel at will.  Wild FIRE, here you come - starting now.  Or you can plunk $850K into the dream house, pay the price, and either FIRE or not depending on your other expenses.  Whether your precious prevents FIRE depends on expenses you control but haven't specified; whether passing up FIRE and reducing post-FIRE flexibility is worth it to you...is up to you.

One thought:  Which do you prefer, wild post-FIRE plans or owning your precious?  Consider picking just one option.

MMM recently suggested that in high-income areas, renting is usually cheaper than owning.  That supports your thoughts, not your precious-coveting heart.  It is likely that you will have at least some difficulty doing both options (own precious, fly free!) so which do you prefer?

Here's a second thought: Of course you can do both, you just have to be a brilliant Airbnb host who rents out precious for big bucks while traveling.  If you fail... well, if you buy in cash, you could always get rid of it for nothing and fly free on whatever you have left.  Is what you have left enough to satisfy your other wants and needs in the event that the Precious Plan fails?

frugaliknowit

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #8 on: April 18, 2015, 04:19:36 PM »
My $.02:

How many SF do you need?
Generally, square feet is the determinant to housing cost, whether owning or renting.

If you bought a larger home, would you take on room mate(s)?
If you plan on renting room(s), the greater square footage can be justified.

How long do you plan to stay in the SF area?  10 years or more?
Don't assume you can predict the housing cycle.  If you hold for 10 years or longer, you most likely won't get tripped in a down cycle.

Ricky

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #9 on: April 18, 2015, 06:23:28 PM »
I was going to say, but several already have, that if you plan on renting it out to a roommate or on Airbnb then you will probably come out about the same and maybe even much better.

It really is a personal decision at this point since you have plenty of buffer to do it. Prices are so high in SF that I'd personally be a tad wary. But - who knows, you can't time the market, and if you rent it out then I think you'll be in good shape regardless.

The real question is - with FIRE imminent, do you think you'll want to stay in San Francisco when your stash could go so much farther in other places in the country? SF is no doubt an amazing city to retire to, but I think in your shoes I'd do the former and get out of dodge.

In any case, you might contact Sam @ financialsamurai.com and show him the property to get his advice. He owns several properties in SF, and recently purchased one. He's well up on the SF market.

MrsPete

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #10 on: April 18, 2015, 06:59:40 PM »
Buying a house for the tax deduction is NOT worthwhile. 

Buying a house so that you're working towards a paid-for place IS worthwhile.  Eventually you'll reach the point that the house is YOURS.  This means you'll lower your monthly expenses, and you'll provide yourself with some protection against inflation.  Plus a house is usually larger and nicer than a rental place. 

A mortgage owns you.  You own a (well chosen) house. 

You should consider whether you want to stay in this area long-term before you make any moves towards ownership.

The Pigeon

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #11 on: April 18, 2015, 08:17:02 PM »
Don't let the pigeon buy the house!

Thanks Historienne (I like this answer the best!) [if you don't know about The Pigeon, he's a character in a childrens' book series, One title of which is "Don't Let The Pigeon Drive The Bus." My avatar is that character. :-D

I would really like to have my own place, somewhere guaranteed mine. I do plan to live in this community for the forseeable future, perhaps until I "cork." But it would pain me greatly to triple my costs. And I'm pretty happy in my 1 BR micro-house (700 sq. feet). It's a bit run down, a bit dingy, (but so am I). ;-) It grinds my gears that the prices here are so stoopid. I just don't know that I could stomach paying close to a million dollars for 1400 sq ft 2 BR/1.5 BA. Despite it's the bestest coolest house I've ever seen.

I'm a bit crowded in here, but am (slowly) working on decluttering. Unfortunately, the monthly rent for a single-family house here is as much as a mortgage--3200-4000/mo, so upgrading my rental isn't on the table. The choice is stay here and soak up the savings, or plunk down the big bucks for an owned home.

I think you folks are right, despite being able to "afford it," I'm likely better off in this no-worries rental--I'm no handywoman, either. I'd have to hire someone for anything more than drilling a hole or pounding a nail. And, since I haven't completely made up my mind about life post-FIRE, it might be good to keep that door open without the tie-down of a house. Just in case a lower COL area begins to ping on my radar, or I feel a flight of fancy to go live on the Big Island of Hawaii for a few months. Or retire to France. Or become a vagabond.

I'm still going to the open house tomorrow to drool. ;-)

--Pigeon will return to her humble little loft and save a lotta dough.

The Pigeon

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #12 on: April 18, 2015, 08:45:38 PM »
I'm gonna share its fabulousness with you all...

https://www.redfin.com/CA/Alameda/1635-High-St-94501/home/1368566

:dreamy eyes:

Ricky

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #13 on: April 18, 2015, 09:03:46 PM »
It's a nice home.

One thing about a purchasing a house vs renting is that there are so many unquantifiable aspects to a house - how much one values fixing up and customizing their house, ability to rent it out, no risk of being "kicked out", etc. But, if you're someone that isn't that handy and would basically leave it as it is then I don't see a reason to purchase vs rent for one of the most intangible reasons that people buy vs. rent.

I know what it's like to get caught up in the intricacies of owning vs renting and finding a house you really really like and want to stamp your name on it. I'll admit I don't like the "idea" of renting myself, even if it's saving me money! I'd rather just own it and do whatever I wanted to it. For you, however, you're getting an incredible deal on rent it sounds like.

How much in taxable do you have? If it's enough, go ahead and rent the place of your dreams until you figure things out.

Rubic

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #14 on: April 18, 2015, 09:16:12 PM »
$1300 for a cottage in the Bay Area !? 

Will you sublet to me when you buy your new digs ;-)

Rein1987

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #15 on: April 19, 2015, 12:50:16 AM »
I'd like to mention that we bought a home in the south bay area a few years ago and sold it this year. The capital gain is tax free and more than the sum of our after tax W2 income for all these years!

If you decide to FIRE and move, you can sell the house. It's possible that the market is not good at that time, looking at the house price trend in the bay area that I believe it will go up in a few years like stock market.

For us, we found it's super difficult to find a "dream" house. We went to more than 100 open houses, but rarely do we find anything we are willing to spend the money. Actually, when we started house searching, we immediately found one we love, but we hesitated and did not submit an offer. Then, it took us more than a year to find another house we like (and in this one year the house price went up crazy). Therefore, I suggest you go forward if this is dream house. Do not buy anything you do not enjoy.

curlyfry

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #16 on: April 19, 2015, 11:22:38 AM »
Thanks for sharing the link! Ooh it is lovely - uh oh there is an open house today!   So many factors, good luck with your decisions!

JLee

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #17 on: April 19, 2015, 11:48:48 AM »
I would get out of the HCOL area and retire right now.

Spork

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #18 on: April 19, 2015, 12:05:35 PM »
It will go for $850-900k.
Assume $850K.  With 20% down, a $680K mortgage at 3.75% for 30 years means $3,149/mo.  The first year's interest would be $25,287.  Property taxes = ____?

At best (e.g., assuming your state income tax is already more than your standard deduction) you will save your marginal tax rate times the sum of (interest + property taxes).

So, compared with $1300/mo, the house will cost you much more and the idea of tax deduction "savings" is illusory.  Up to you to decide, however, if it is worth it - maybe it would be, maybe not....

This is the right answer.

I generally give a more flippant answer:  Assuming you're in the 28% bracket -- would you spend a dollar for 28 cents savings?  Don't look at it as 28 cents of savings.  Look at it as 72 cents of cost.

You buy the house you need and can afford.  If you get a tax break, that's a bonus.  But I wouldn't use the tax break as reasoning for why to buy it.

and fwiw: I live in a low CoL area.  $850k here is a mansion.  I'm with a few of the others here.  You could easily move to a low CoL area and buy a much cheaper house and be FIRE right now.

zolotiyeruki

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #19 on: April 19, 2015, 01:43:42 PM »
I'll add my voice the chorus of "why aren't you already FIRE?" and "do you REALLY want to stay there?"

Yeah, I get that you might really like the SF Bay area.  But gracious, do you realize how much house $900k will buy, say in the Houston area?  You're looking at 7,000+ sqft mansions with 6+ bedrooms, private pools, 1-5 acre lots...it's ridiculous.  $200k will get you a *very* nice (and normal) home.  Leaving you $2.2m to give you nearly $100k/year worth of spending.

Or maybe I'm just a friendless misanthrope who hates people :)

GetItRight

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #20 on: April 19, 2015, 02:38:56 PM »
So you're considering a $900k house and you have $2.7 mil invested? On the first, that's insane. Between the house price and property taxes you're sabotaging yourself. Why aren't you retired? $108k/yr isn't enough? Unless you love you job or working situation and really look forward to it every day I'd pull the plug and get out of that socialist hellhole, relocate to a low cost of living area and buy your dream house there for 1/3 or less the price and pay less taxes too.

In short, no way, do not buy the house, there is nothing worthwhile about a $900k house in CA. Unless you have some specific expensive goal go ahead and RE now, sounds like you are already FI.

The Pigeon

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #21 on: April 21, 2015, 03:00:01 PM »
Thanks for your guidance and frankness.
I went to, and enjoyed, the open house. And I picked up a fancy color real estate brochure to remember it by.
You all raised great points, and you'll be happy to know I will NOT be buying that house (or any other overpriced house around here).
I'd *much* rather be firmly, and confidently FIRE'd.  :-)

I do really like the Bay Area, and intend to stay here until my dotage. Despite the COL decrease of other places, this is where my friends are...

And yes, I will FIRE in the next 12 months. I would be now but there are some circumstances... :-/
Looking to pull the plug in 12 months or less ...oh geez... One More Year. Ha ha!

More likely, I might FIRE Dec. 31 or thereabouts, and start fresh as a retiree in January.

In the meantime, I'm doing a lot of reading, tax planning, research, etc, so I will be as fully informed as possible for post-employment. And you all will be a part of that!  I appreciate all of your input and experience to help others--especially since I haven't anyone close with whom I can share and/or ask about these things. (Seems weird to be "confiding" in a public internet forum, but...)

Thanks!
-Pidgey

NorCal

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #22 on: April 21, 2015, 09:46:06 PM »
I feel your pain.  I'm also in the Bay Area, and very much WANT to buy a house.  But when I run the numbers, it makes no sense.

I agree with the other comments that you should not purchase unless this is a priority over FIRE.

To answer your specific question on taxes, the exact formula to calculate your tax savings is  loan interest rate * (1 - your marginal tax rate).  This will tell you what your after tax interest rate on the loan is.  Then you add back any new property taxes you'll be paying.  The nuance is that your property taxes are typically deductible, but not if you fall in the AMT (which I assume you do).  At least this is how I understand it works, but I'm not an expert on the topic.

In my personal situation (which isn't necessarily representative), the value of the income tax deduction would be roughly the same as my property tax liability.  So the savings would be nill.

Jeremy E.

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Re: Buying a house? Is the tax deduction worthwhile?
« Reply #23 on: April 22, 2015, 01:37:52 PM »
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
a great post on renting vs owning.
You already get a standard deduction that reduces your taxes, if you itemize then only the interest above the standard deduction will save you money.
If $850k is 1/3 of your stache then you're already a multimillionaire and I would retire tomorrow, move to a place where land is a little cheaper, maybe a suburb of the same city if you have friends there. Build your own dream home for much less than that house.  Then, since you probably spend way more than you should, seeing as you are a multimillionaire that isn't retired. You should make it your full time job to learn to be more efficient. Then live happily ever after.
« Last Edit: April 23, 2015, 10:01:45 AM by Jeremy E. »