Taxes benefits and down payment on a house...

we'll need to know your 5K PR and preferably see some pics of your significant other to provide an answer.

How long have you been in the area? Sometimes its better to rent for a couple of years while you can really take time to find the right place.

5k PR - 14:50 on the trackCouple years in the area. Looked a few places, but this one is kinda checking all the boxes. The additional of the rental income is a real nice feature and the final selling point of this property.How would I walk through the tax benefit of house purchase?

Bring Back the 880 wrote:

we'll need to know your 5K PR and preferably see some pics of your significant other to provide an answer.

How long have you been in the area? Sometimes its better to rent for a couple of years while you can really take time to find the right place.

Turbo Tax has a good refund predictor that you can use to toggle with different numbers to see the tax implications (assuming that you have pretty basic income tax situation).

The bigger question is whether the market in your area is inflated or whether there is room for appreciation. If the market is hot and could come back a lot in a bad economy, you will want to put as much cash in as you can to avoid being trapped upside down if you have to move. It is pretty easy to get upside down with only 50k on a house in your price range.

If you can't put down at least 20% to avoid PMI then you really can't afford a house

Price income ratio is only ~3.5x, which for Cali is pretty reasonable. Our cash-flow is pretty strong because we don't have any other debt. We have more cash, just not sure if makes sense to use it all as a down payment.If we did get upside down, we could use cash we don't use on the down payment to get back to even. Just wondering why we should do it now rather than wait till if/when that happens.We're in a pretty desirable part of Cali so the market will go up and down as it always has. But I'm pretty sure we'll be able to sell at a similar price within a 5 year window if need be, though we plan on staying longer.

dude, really? wrote:

If you can't put down at least 20% to avoid PMI then you really can't afford a house

Cool! Thanks a lot!

Bring Back the 880 wrote:

http://www.irs.gov/publications/p936/ar02.html

HGTV wrote:

Price income ratio is only ~3.5x, which for Cali is pretty reasonable.

I'm not saying you shouldn't buy it, but why would living in CA have any bearing on whether you can afford something?

Cali and New York are known for being outliers in the price to income ratio. People typically spend more of a percent of their income on housing in these markets. I'm just saying relative to the market (prob a 4.0x to 5.0x ratio for a lot of people in Cali) this seems pretty reasonable

changing math wrote:

HGTV wrote:

Price income ratio is only ~3.5x, which for Cali is pretty reasonable.

I'm not saying you shouldn't buy it, but why would living in CA have any bearing on whether you can afford something?

HGTV wrote:

Cali and New York are known for being outliers in the price to income ratio. People typically spend more of a percent of their income on housing in these markets. I'm just saying relative to the market (prob a 4.0x to 5.0x ratio for a lot of people in Cali) this seems pretty reasonable

Yes, but I guess I don't view that as a good reason (others are doing it) for spending so much of your income on a house.

Again, I'm not advising you either way, but I'm trying to advise you to consider this carefully since this can go very wrong if you want to sell your 'entry level' home after 5 years of a 30 year mortgage if the market is down 10 percent. I know many people in a cheaper market (Chicago) who bought 'entry level' homes at the high end of their limit in the mid 2000's with little money down. Many of them now want out of those homes and can't afford to sell almost 10 years later. I'm putting quotes around entry level because there's nothing 'entry level' about trying to sell that house you couldn't afford in a down market, especially when you own such a small part of it. You'll be in the thick of stress and anxiety.

Your realtor is not your friend in these calculations. I've never heard one advertise how many taxes and fees are tacked on to selling a house-and there are several more percentage based fees/taxes than just the realtor. After selling recently, I believe that the fees are all tacked on the seller to help keep the market churning. It'd be a lot less appealing to a buyer if they came to the closing and had 10% immediately tacked onto the final price in order to pay the realtors and tax men.

The tax deductions on a mortgage are an incentive to get people to take huge loans that they end up paying a ton of interest on. The fact that that loan has incentives ought to tell you that not paying interest on a huge loan in the first place might be a better alternative. Now, paying rent might be worse in your situation, but I'd suggest you carefully price this out if you aren't looking for a house for a long period of time.

Some good points in there. I plan on staying longer than 5 years, but use that as my minimum because a lot can change in life in 5 years.

We're at $2k in rent so we're putting a decent amount of cash in the bank each month right now so not in a huge rush to buy. However, this property is on a lot nearly twice as wide as typical lots and within walking distance to downtown and the ocean, which I think are the three things that will help it maintain value long run. I would also be collecting $1k a month in rental income from the house/cabin on the back of the lot.

Trust me when I look at the trends on zillow or that article you sent it makes me a little concerned to see +20% gains in one year. However, since the market does cycle as I mentioned, within a 5 year period I think I could sell at the price I buy... which leads me to your best point, the selling costs.

If I sell at what I bought, I'm losing 6% or about $46.5k in this case, or basically my down payment. That's def something to consider.

I guess the flip side is paying $2k a month for the next 5 years is $120k out the window.

The rental income would be a major benefit. Apply that towards the principal every month, and you'd make some headway. None of the calc's below factor in that money.

You will pay much more than 6% to sell if you use a realtor. We lost about 10% of the final cost in our recent sale through additional nickel and diming without having to make any repairs. The realtor doesn't even have the best deal at the end-they at least do something that contributes to the sale. You'll be paying other percentage based fees to entities or agencies you've never seen or talked to during the sale process, and you might have to make repairs too.

Regarding your rent--during the early stages of a 30 year mortgage you are largely paying interest. In five years of a $725k mortgage at a 4.5% rate, you'd pay $220k just for the mortgage ($3675/month, not including insurance, PMI and taxes--you're well above $3675 when you include all those extras). You'd buy $65k off the principal, meaning you owe $660k if you sell at that point. You're paying $155k in interest that's out the window just like the rent (minus the almighty tax deductions). If you sold at that point for $775k, you'd have around $700k left after paying the ~10% in fees. You pay $660k to the bank and you've lost around $10k on your $50k downpayment. You also got some tax deduction benefits, but you also paid property taxes, PMI and some repair bills. (Double check all that math, because I did it quickly using an amortization table off the net).

Bottom line: I think you lose money if you sell at the same price in 5 years because almost all of the transaction fees are built into the seller's side. You could also win huge if the market spikes. You could also win huge due to the rental money. You could also have to evict a tenant and pay huge repair bills. It's simply a gamble if you're in it to make money.

Again, I'm not trying to dissuade you, just hoping you consider all the costs (and the true ones at that). You might not hear them from the real estate agent. You are going to pay good money for a place to live for the rest of your life, and I would say that money shouldn't be the only factor in those decisions. There is no free lunch or EZ MONEY to be made unless you get lucky or work very hard to know the market. There are certainly deals to be had, but you can easily be the sucker in those deals.

Specifically the tax benefits are the following:

1. Interest expense on loans for buying your home and loans up to $100K on loans secured by your home to spend on non house expenditures.

2. Any gain is tax free up to $500K (I take you are married) if you live there for any extended time and don't rent it.

3. If worst comes to worst. You become unemployed, your house is underwater, and you get foreclosed on. The mortgage debt written off is not taxable. I believe that is still the law. While I wouldn't take it to the bank that it will always be the law, its a good bet its there permanently. Its probably meaningless now to you but its potentially a huge tax benefit for some people.

Note however what is NOT a tax benefit. You can't take deductions for depreciation of your personal residence or repairs and maintenance like you can for rental property. Again, that probably seems like no big deal. Its just some abstract thing. But we have expense for depreciation for a reason. Buildings really do depreciate over time. That is partly why I think the price of housing is absurd. In 2008 prices were only getting back to normal. Now they have gone right back into bubble territory.

I have to say I'm also in the "don't buy unless you have the 20%" camp. it's not about taxes, it's about the rates you can get. There will be a correction in the market over the next 5 years, probably within 2. If you put only $50K down (plus closing costs) and take out a $725K mortgage, you'll be under water as soon as the value drops 6.5%. I'm in tech too, and in that situation the "design area" people are first to get laid off. It only has to happen to one of you before you're basically fuc\ked.

Just telling it like it is. I have no dog in this fight, but I would never do what you're about to do here.

[quote

I guess the flip side is paying $2k a month for the next 5 years is $120k out the window.[/quote]

As opposed to paying $29K in interest x 5 years, so $175K out the window? Also no strings attached if you leave, no repairs. At best you get back about 0.30 on the dollar for interest tax deduction, probably more like 0.20. Also there is no guarantee that lasts forever, it is a completely bogus deductions and will be eliminated by any sensible tax reform. Only about a 20% chance of that happening, but I'm just saying the interest deduction is not a certainty and if that is all that is driving your decision you need to realize this.

The housing market in CA is ridiculous and overvalued, no matter how you try to justify based on what other fools are doing.

Just look at how the economy is doing right now, overall pretty well. Do you think it will be significantly better in 5 years or possibly worse? What about home prices? What if you just save your extra cash and buy in a more favorable market.

HGTV wrote:

5k PR - 14:50 on the track

Couple years in the area. Looked a few places, but this one is kinda checking all the boxes. The additional of the rental income is a real nice feature and the final selling point of this property.

How would I walk through the tax benefit of house purchase?

Bring Back the 880 wrote:

we'll need to know your 5K PR and preferably see some pics of your significant other to provide an answer.

How long have you been in the area? Sometimes its better to rent for a couple of years while you can really take time to find the right place.

Yeah, but what is your position on gay marriage? We cannot give good advice until we have that information. Be careful, because if you answer wrong, you will pay.

One other thing .... OP and wife make >200K/year and, if they buy this house, will have very large interest deductions / property tax deductions / state tax deductions. Will they have those deductions reduced by AMT? No expert here but they should go through the numbers.

This is too important to get random answers from here. Find yourself a great fiduciary. Either a lender or realtor (or both) that does this kind of analysis professionally. It's in your best interest as a buyer anyways to enlist their help. Look for a realtor with the CRS (certified residential specialist) designation.

And email me if you'd like a hand getting a hold of a CRS. I can absolutely find one for you in your area.