Remember to include tax benefits when comparing Renting to Buying with a loan

For too many people, this simple reality is missed, and they look at the cost of renting as being cheaper than buying.  When comparing renting to owning, the monthly cash cost is not the same, because rents are not tax deductible.  Almost all of a home loan payment and all of the property taxes are deductible for income tax purposes.  This means that an employee can change their "W-4" form with their employer to increase their allowed deductions used to determine Income Tax Witholding.  The result is that the paychecks go up to account for a smaller Income tax bill at year's end.
This means, for instance, that a $2,000 monthly ownership cost of mortgage, taxes, and insurance can be the same monthly cost to you as a $1,500 rent.  Why? Because the difference is dollars you get to keep instead of paying for Income Tax.  This is perhaps the number one way to divert Income taxes to pay for something you want to pay for. You never have to pay those income tax dollars back!  It is absolutely legal, and the law is intended to encourage home ownership.  For too many people, this simple reality is missed, and they look at the cost of renting as being cheaper than buying. 
In many markets today, there is little or no difference in net monthly cost between renting and buying, even using a loan with only 3% downpayment!  Tax dollars you will not owe make up the difference.
NOW IS THE TIME TO BUY A HOME WHILE LOW PRICES AND LOW INTEREST RATES MAKE THIS POSSIBLE!  THIS COMBINATION WILL NOT LAST.  DO YOU REMEMBER WHEN 77% OF RENTERS COULD NOT AFFORD TO BUY? NOT NOW.
When paying rent, you are paying off a loan... your landlord's loan, and you get no income tax benefits.  Buy a home now with a conventional loan, and you start paying off YOUR loan, using tax dollars, so someday you may own your home with NO LOANS AT ALL !
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February 25 2011 - Randall Manor
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Profile picture for shasta_steve
Considering a married couple with no kids can make in excess of 85k before they even get out of the 15% tax bracket, with a standard deduction, most of what you posted is smoke and mirrors.  The standard deduction is $11,400 for a married couple also so unless you pay a hell of a lot of state tax and give very generously to your church, lots of that money you pay in interest and taxes will be eaten up just getting to that number for most people.  If you want to talk about the "cost of ownership" of a house you have to include to cost to keep it up but then that would hurt your sales pitch, I mean advice. 

I am a big fan of owning my own house.  I hate to rent but for the most part the tax deduction for owning a house is one of the most over hyped things out there.  Agents and lenders that tout it generally have no real idea of what they are talking about but that is pretty normal around here. 

By the way I just did my taxes and my great windfall was about $100 a month on the house I bought in late 2009 and believe me I had to get creative to even get that.  
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February 26 2011
Profile picture for TomMCA
Tax benefit of home ownership is OVERRATED.While it's true but benefit is not as big. Let's look at this example: Let's say a $2,000 monthly payment is for home with about $375,000 value with $300,000 loan @ 5% i,interest is about $1250 and tax  $375 x12=19500 this amount will be deducted from income and with a couple in 30% (fed+state) tax bracket tax saving is $5850/year or $487.5/month...good....but wait a moment, you haven't heard the rest of it: same couple could get standard deduction of $11400 so the REAL tax benefit is 19500-11400 x 30% or $202/month...and since interest payment goes down and standard deduction increases, each year this benefit shrinks to a point that it is better switch to standard deduction....if you take into account that down payment could have earned interest + home has average $1000- 2000 annual maintenance, unless price of that home appreciate AT LEAST 4-5%/year renting may be a better option.
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February 26 2011
Profile picture for wetdawgs
Oh my!  Sounds like you buy hook line and sinker into NAR standard lines without having done the calculations yourself.

Imagine I can "save" $200 a month in taxes by paying a $2000/month mortgage.  Yet, I could rent the same property for $1200 per month.   By the time I'm done with elementary school as a slow learner, I know which one would be the better deal.  Yes, I know over the years things will change but how many people really live in a house for 30 years?   Some do, but isn't the average about five? 
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February 26 2011
Yes, 
  Looking into the "Now" scenario can seem like it is not worth it to buy vs. rent.  However, as wetdawgs observed, the opportunity to pay off your loan is an amazing opportunity.  This can go quite fast, just by kicking in a little extra to pay down the principle of the loan each payment.  Rents will only keep going up forever.
For me, the most rewarding investment I ever made was my own home.  My father told me " Paul, remember, Real Estate makes money for you while you sleep."  It has done this for me, even with the ups and downs.
The other benefits, like having privacy, and making it look, feel, and work your way without having to ask permission, is such a free feeling.  Yes, you do have to do the maintenance.  Don't let it go.  However, even that can be rewarding when you know IT'S YOURS!
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April 06 2011
Paul: you aren't very good at reading are you? Sadly, you don't seem to understand ANYTHING that wetdawgs actually said.

Your example is incorrect. You can only deduct interest on your mortgage to the extent that itemizing EXCEEDS your standard deductions.

In my case, with a 200K mortgage, my interest deduction is precisely $0. Yep nothing. My standard deduction is bigger

"housing makes money while you sleep" Yeah, well for the last 4 years, many people have found that "housing can lose tons of money while you sleep" too.

Only buy when the price/rent comparison comes out in the favor of buying, and don't let a sales agent with only a passing ability to understand tax deductions mislead you.  
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April 07 2011
 
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