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Should I Buy a Home for Tax Purposes?

Written by Eva Rosenberg on November 19, 2013 in Tax  |   No comments

The house next door to me just sold for $369,000. The owners bought it in the 1970s and paid $27,000. After all costs and fees, their profit will be over $300,000. That’s good for them—but what about for you? Is buying a home the right…

buying a homeThe house next door to me just sold for $369,000. The owners bought it in the 1970s and paid $27,000. After all costs and fees, their profit will be over $300,000. That’s good for them—but what about for you? Is buying a home the right move?

The real estate market is still good for buyers

The bad news is that the price and interest rate slumps are over. During the last three months, real estate prices have risen by 5 percent or more in my neighborhood in Kansas City, according to Zillow. Check the prices in your neighborhood; you might see the same thing.

Interest rates, too, are on the rise. Freddie Mac says the average interest rate for a 30-year fixed-rate mortgage is 4.1 percent. Last year at this time, it was 3.39 percent—that’s quite a jump.

The good news is that prices are still low right now. Even if you end up paying 4.5 percent interest on your mortgage, that is half the interest rate I paid when I bought my last two homes.

Is buying a home more affordable than renting?

Compare the rent you’re paying to the cost of a home in your area. I selected a random house in Kansas City, MO, using Zillow. It is a two-story, 2,678 square foot home with four bedrooms and three baths. It’s on the market for $168,000, and the fair rental value is $1,958 per month.

If you are renting a house like this for $1,900 a month, which is nearly its fair market rental value, you may want to consider what it would cost to buy that same house.

Assuming you could afford a 10 percent down payment, your mortgage would be around $151,200. At 4.5 percent interest, your monthly mortgage payment on a 30-year loan would be around $771. Property taxes and insurance would add approximately $500 more per month. In total, you’d spend about $1,271 per month to own the home (not taking into account maintenance and repair costs).

In other words, you would save nearly $630 per month by buying vs. renting this home.

Are there tax benefits to owning a home?

When you own your home, you can generally deduct your mortgage interest payments and property taxes. The annual mortgage interest expense is over $6,000 for the next six years, and the property taxes are around $3,600. Although you pick up nearly $10,000 in tax deductions, that’s still lower than your standard deduction, which, in 2013 for a couple filing jointly, is $12,200. There doesn’t seem to be much of a tax benefit for owning a moderately priced home.

What about the $630 cash savings—isn’t that worth it?

When you own a home, you are responsible for all the repairs, maintenance, gardening, roof repairs, repainting, plumbing, and more. From my experience as a homeowner, I think it’s wise to set aside at least $500 per month.

You’re still in pretty good shape owning as opposed to renting. If you factor in that $500, your total per month comes to $1,771 per month, which is still $129 less than renting.

Of course, there are two things we haven’t covered that might factor into your decision:

1)   The time investment required to do all the maintenance and repairs (and the fights with your spouse about getting these tasks done).

2)   Appreciating home values. While market values are not rising as quickly as they were in the early 2000s, they are rising. That’s ideal if you’re planning to stay in the home for a long time, such as while your children go through school. By the time they all leave home, you’ll have a nice nest egg in the house.

You never know. Twenty or 30 years from now, you might have as big a windfall as my next-door neighbor.

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

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