Never Rent! Let Uncle Sam Help Pay for Your House

One of the most revered “Sacred Cows” in the Tax Code is the deduction that Homeowner’s are allowed to take for the mortgage interest and property tax expenses they pay on their primary residence. Homeowners are allowed to write off mortgage interest and property taxes against the income they earn.

Under the Tax Code, a married couple earning more than $68,000.00 after deductions, pay 25% tax for money earned over the $68,000.00. As you earn more money, the tax rate increases progressively and reaches 33% for income earned over $209,250.00

So, how does Uncle Sam help a Homeowner pay for a home?

Simple, the government allows a write-off for the Mortgage Interest, and Property Taxes. This amount is deducted from your highest tax rate. Consider a typical example:

Mr. & Mrs. Fickle make $100,000.00 net income every year and are trying to decide whether to rent or buy a $300,000.00 home.

–       Option #1- If they rent, it costs $2,000.00 per month, to rent a $300,000.00 home.

–       Option #2- If they buy, PITI (principal, interest, taxes and insurance) for the $300,000.00 home cost $2,400.00.

The Fickles  want to spend as little as possible so they rent.

 BAD DECISION! Take a look at how the numbers below really work in favor of buying:

Rent (increases 5%/year)            Purchase                                                Home Appreciation (@ 5%/yr)            Total Appreciation

$2,000 in monthly rent                        $2,400.00 PITI- 30 yr mtge                     $300,000.00 – Purchase                         $488,668.00 final value

   x12 months                                             x 12 months                                           $315,000.00 – year 1                              -$300,000.00 purchase price

$24,000.00 – year 1                               $28,800.00                                            $330,750.00 – year 2                              $188,668.00 Gain

$25,200.00 – year 2                                – $7,200.00 tax savings*                        $347,288.00 – year 3

$26,460.00 – year 3                                $21,600.00 net paid annually                $364,652.00 – year 4

$27,783.00 – year 4                                          x 10 years                                    $382,884.00 – year 5

$29,172.00 – year 5                                $216,000.00 Total Paid                         $402,029.00 – year 6

$30,631,00 – year 6                                                                                              $422,130.00 – year 7

$32,162.00 – year 7                                                                                              $443,237.00 – year 8

$33,770.00 – year 8                                                                                                $465,398.00 – year 9

$35,459.00 – year 9                                                                                                $488,668.00 – year 10

$37,232.00 – year10

$280,269.00 Paid to a Landlord! (Ouch!)

Option #1. The Fickles Rent – They pay their Landlord $280,269.00! (Their landlord thanks them!!) Like most Americans, the Fickles have lived the good life, but have saved NOTHING! and have NO EQUITY IN AN INVESTMENT! (Yay! Let’s do this for another 30 years and be like most Americans that haven’t purchased a home and aren’t prepared for retirement.)

Option #2. The Fickles Buy –

A.     They save $64,269.00 over 10 years because rents continue to increase and because of the tax savings they enjoy as homeowners, Uncle Sam pays the difference. *(The savings is calculated by taking $28,800.00 x 25%, their tax bracket for all income over $68,000.00 for married filing jointly.)
B.     Their home is worth $188,668.00 more than what they paid. Keep in mind this is with a 30 yr. fixed rate mortgage, and doesn’t include principal payments which are minimal in the first 10 years.
C.     If the Fickles were to give the bank the tax refund check every year and the extra they would have to pay if they were renting, in approximately 20 years their home would be paid for. That’s another $300,000.00 more in their pocket when compared to renting.
D.     Under “B” and “C” above, the fickles would be $188,668.00 + $300,000.00 = $488,668.00 ahead of where they would be if they had just rented for 20 years.

    If you know of anyone that is thinking about buying a home, maybe you should suggest they stop being “Fickle”!