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21: Does Home Ownership Make Sense?

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By the time you get this email, I will have moved away from my beloved 6500 square foot home in the northern suburbs of Chicago to a quaint little 2000 square foot beach rental in Southern California.

You see, when you live somewhere that’s miserable outside for a good chunk of the year, you make up for it by buying a big house–you spend a lot of time in there so it becomes sort of an island with its own microclimate in the middle of January.

My Chicago house is on the market and hopefully, I will be able to sell it soon and become a full-time renter for a few years without my own mortgage.

It’s not that I don’t like owing a house. I do. It’s just that the housing market is at its peak again, especially in Southern CA, and I would rather buy during a market correction.

Why do I want to buy a home, anyway? I don’t really know how to answer that other than to say I like the idea of private property.

The reality is, however, that when you look at the math, owning a home doesn’t always make sense.

Listen, I understand that a lot of people consider their home as their biggest asset and rely on selling it as part of their retirement plan.

That’s a bit speculative for me. So let’s look at it through a slightly different lens.

If you take out the hope of appreciation out of your home and the small amount of equity you are gaining on a month to month basis, your main benefit to home ownership is the mortgage interest deduction.

This is a big deal for many of you because it is your only real deduction. If you are a high paid W2 employee, the only means of tax mitigation you have is the home mortgage interest deduction, investments in oil and gas drilling, and conservation easements–the latter two are available to only accredited investors.

The mortgage interest deduction, of course, allows you to deduct the interest on mortgages up to $1 million.

I should add that there is a phase out that you have to consider as well.  If your adjusted gross income is over $166,800, this affects you. The phase out works like this–for every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions.

Example: 

You salary is $266,800  and you have a $50,000 in mortgage interest deductions.

$266,800$166,800 = $100,000.

Then take $100,000 x 3% = $3,000.

Finally, take $3,000 x 33.3% = $999.

You can now only deduct $49,001 ($50,000$999) from your income instead of originally $50,000.

That’s the way it works as of today. Trump’s tax plan would render the deduction null and void for most Americans as it calls for doubling the standard deduction and repealing the state and local tax deduction (http://www.politico.com/story/2017/08/04/trump-homeowner-tax-benefit-241328).

If that happens, owning a home will make mathematical sense for very few people.

But let’s be clear, none of this means you shouldn’t own real estate. In fact, it may very well make sense for you to rent your own personal residence and own rental property for income.

After all, mortgage interest deductions on rental property aren’t going anywhere. If you are operating your rental property as a business, a mortgage interest deduction is an expense that you write off. So is depreciation which you do not get from owning the home in which you live.

The reality is that for most of us who are NOT W2 wage employees, the capital outlay of a downpayment on a personal residence really isn’t worth it compared to taking that same money and investing it into a cash flowing rental property on which you could write off expenses, mortgage interest deductions, and depreciation while enjoying equity growth and appreciation.

And for those of you who are W2 wage earners, keep an eye on tax legislation, if the mortgage interest deduction goes away, not only will your taxes be affected but it will likely also negatively impact the value of your home as there will be less buyers in the market.

That’s the math–but not all things are quantifiable by a calculator so I’m still going to buy a house when there is blood in the street!
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