Rent or own? It’s not just about tax deductions
The housing market is definitely on the uptick, and rents are rising in most neighborhoods. There’s a tendency, however, by both landlords and salespersons to juggle numbers when they are trying to prove a point.
I was reminded of that recently when I received two pieces of information — one attempting to show the benefits of home ownership, the other the benefits of renting. Both left out important facts that might alter a consumer’s decision.
For instance, the pro-own information showed a monthly tax savings that included a deduction for a $2,700 “points-loan fee.” But if the $2,700 was listed as an itemized deduction the first year, it’s misleading to say the owners would net a monthly savings over a renter. That fee deduction would not be available after the first year of the loan.
Having a mortgage often instills the perception that the mortgage renders a greater benefit than what ends up on the tax return. Some wealthy people who easily have the means to pay cash for a home take out a mortgage because they believe all the interest is a dollar-for-dollar tax deduction. Mortgage interest, however, only reduces taxable income.
When a home loan is amortized (repaid over time), monthly payments are composed of an interest portion and a principal portion. Some payment methods include monthly portions that go toward real-estate taxes and insurance. The most popular repayment period is 30 years.
During the early years of loan payments, the greatest portion of the payment is to interest. As the loan is repaid, the interest portion is reduced and the amount going to principal rises. So, homeowners get a greater tax deduction on home interest during the early years of the loan.
That is also one of the reasons why some consumers prepay loans before they come to term. They take the benefits of interest deductions, then pay off the loan in full when mostly principal remains.
The pro-rent example showed a couple in the 28 percent tax bracket would save $118 a month by paying mortgage interest and tax over renters taking the standard deduction on their tax form. If the renters took the buyers’ down payment amount and put it in the bank, they would make as much money as the owners save, or so the argument goes.
Unfortunately, the pro-rent example assumes the couple has only interest and taxes to deduct. There is nothing said about charitable deductions, child care or educational expenses. The more itemized deductions would improve the benefits of owning.
Other data offered by the pro-rent folks was a recent Federal Reserve Survey of Consumer Finance, which breaks down household compensation and net worth on the whole and across various demographic categories. The study showed that renters “lost less” than owners, but owners typically have more assets (stocks, bonds, other property) than most renters. Using the example solely for a rent-buy comparison is not fair.
According to the study, Americans lost both income and wealth from 2007 to 2010. Falling home values played a part in this decline. Median net worth for home-owning families dropped from $246,000 to $174,500, a decrease of slightly more than 29 percent.
By comparison, median net worth of renters fell from $5,400 to $5,100, a 5.6 percent loss. However, financial gains and losses for renters are typically much smaller than those of homeowners, authors of the Fed report noted.
“Renters have much lower median and mean net worth than homeowners in any survey year, so the dollar value of wealth losses for the renter group tended to be much smaller,” the analysts wrote.
They also explained that the housing collapse wasn’t the only factor that caused wealth to shrink. Assets of all kinds declined in value over that span while household debt essentially remained the same. So, saying all renters “lose less” is not really fair.
The price of ownership means different things to different people. For some, it’s pride of ownership, setting roots in a community and the potential for long-term appreciation. For others, it’s the anxiety brought by a leaky roof and a huge, overgrown yard.
Don’t just focus on tax when considering a home purchase. Spend more time with how and where you want to live and the length of time you plan on staying there.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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