The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: aes421 on January 07, 2019, 01:51:03 PM
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Hello all,
My SO and I are 24 & 25. We both have stable jobs making 74k and 50k. We currently max both 401k, both Roth IRA and our HSA. No debts and each have 2015 cars so don't expect too many repairs down the line.
Our current decision comes to buying our home: We live on a state line. One state (Tennessee) the houses are more expensive, has higher property and sales tax, but has NO income tax. The other state (Mississippi) has much cheaper houses, lower property and sales tax, but we will pay 5% income tax.
To break it down further:
We currently live in a 2 bedroom apartment in TN and pay $936.
Near where we work is the "rich" area, so a house would cost us between 250k-300k. We cannot afford 20% of a house that size currently so we'd either have to wait a few years or pay PMI. No income tax in this area though. 10-15 minute drive to work.
If we move to Mississippi we found a home we like for 170k. We can afford the 20% down payment now. 5% income tax would apply. It is a 20-30 minute drive to work, but we can carpool. Our church and all of our friends live near the area so we are already driving down their 3-4 times a week as it is.
We like the idea of living in MS because it's near our friends and church, but we're not sure if it financially makes sense. Any thoughts would be appreciated. Thanks!!
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Very rough guess, your MS tax burden might be in the range of $3500. Property tax values vary by locality, but I just used the average for each state, and based on the house values you'd pay 650 more in prop tax per year in TN. So MS costs about $2850 more.
Again rough numbers, mortgage calculator says principal and interest for a MS house might be 10k/year, whereas TN would be 15k. So that's about 13k yearly in MS versus 15k in TN- even before accounting for PMI and insurance, MS is looking like a winner on a cash flow basis.
Of course, the mortgage builds equity, so not all that payment is being 'thrown away'. If we look at just interest, over the life of a 30 year mortgage, in TN you'd pay maybe 65k more in interest. Which is about 23 years worth of MS income taxes right there. So if you retire before 23 years pass, you'll definitely come out on top buying in MS.
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I may be answering a little differently than your expecting, but here goes:
Why you want to buy the house matters more than the house itself. Raising kids is simply easier in a house. Having friends and family over is easier in a house. Doing certain tasks like gardening is much easier in a house.
These are the kind of reasons you should buy a house for your family. A lot of folks will make a bad buying decision that wears on them over time because they think buying a house will give them some economic advantage or provide them some great tax benefit. That's really not the case.
With that in mind and using the very limited information you gave, I'd recommend you buy the house in Mississippi for the following reasons:
- It brings you closer to friends/family/church.
- It fits within your budget.
- You like the house, which means you've got a checklist of things you want and it checks at least the most important boxes.
- jobs change and shouldn't be the primary driver in home buying decisions.
Income tax, while awful, is still usually offset by other things tax-wise - especially in a state like Mississippi. Also, if you FIRE, Income Tax isn't going to be as much of an issue. There really doesn't seem to be much of a reason to pick Tennessee except you're concerned about the income tax?