From: asylvain@felix.filenet.com (The Chipmunk)
Newsgroups: misc.invest.real-estate
Subject: Re: Tax break
Date: 27 Aug 92 00:19:27 GMT
            <1992Aug24.174452.8612@nb.rockwell.com>
Reply-To: asylvain@fritz.filenet.com (The Chipmunk)
Distribution: na
Organization: Foundation for the Increased Wealth of Chipmunks

Written in article <1992Aug24.174452.8612@nb.rockwell.com>
 by guthrie@nb.rockwell.com (Karen Guthrie):

: In article <1992Aug20.115555.3620@arizona.edu>, smith@navajo.rc.arizona.edu 
:    (dennis smith) writes:

:> I prepare my own tax forms every year. The only break I can see is for the
:> amount of interest I paid on my mortgage in excess of what ever the
:> standard deduction for that year is. I accounted for property and car
:> taxes. So let say you pay $10000 in mortgage interest, property tax and
:> other deductions, and the standard deduction for the year is say $5750.
:> your saving will be (10000-5750)*.34=$1445 in tax dollars (assuming that
:> your marginal tax bracket is 28% and you pay 6% state tax). So you are
:> paying let say $8000 dollars in interest and you are saving $1445 in
:> taxes. I would rather pay my mortgage as soon as possible and pay uncle
:> sam the extra tax rather than pay the hefty 8000 dollars to a mortgage
:> company. You can always argue that I could invest the extra payment and
:> earn some interest, but with todays rate and the tax liablity on earned
:> interest, I still think paying off the mortgage is the safest way of
:> investment.

:> Am I missing anything here ?        

: No I don't think that you are missing anything except that a house isn't
: very liquid and that all of your eggs would be in one basket.  Otherwise
: there is just this strange phenomenon that I have noticed where some
: people don't care what they pay just as long as they save tax dollars.  I
: on the other hand only care about what I can go out and spend.

It's good to perform the exercise to determine exactly what your
situation is.  Frequently, people use the phrase, "well, it's tax
deductible," as tho that equates to "free."  This is an emotional 
holdover from the days when 90% tax brackets existed.  With that 
kind of rate, in a sense, being deductible almost really was "free."  
Even the more modest rate of 50% meant you sort of went 50-50 on 
costs with good ol' Uncle Sam.

No longer.  The rules are not so simple.  Today you've got to actually 
sit down with a tax form and work it out.

I did so for a hypothetical family of four making $40k/year, with and
without a $10k mortgage deduction.  The federal taxes worked out to
$3953 and $3270, a difference of $683 (this family turned out to be in
the 15% bracket).

A $10k annual mortgage is likely for a $100k loan at 10%, which is $878
per month.  The tax savings is $57/month.  If you could rent your house
for $821/month, you're breaking even month-to-month.

But things can be complicated.  Suppose this family happens to pay 
property taxes on the house of $2k, and happens to be Mormon so they 
tithe $4k.  Now they have $6k, so the mortgage interest is completely 
above the standard deduction.  Now they pay $2370 in taxes, a savings 
of $1583, or $132/month.  That makes the rental equivalent $746, which 
is starting to get more reasonable.

If they were merely renting, there'd be no property tax, and the tithe
isn't large enough to get them off the short form, so there's no need to
compare against that scenario.

Potential appreciation changes this picture of course, but then it's up
to the individual to decide whether it's more advantageous to invest in 
a house, in stocks, bonds, or in treasury bills.  Obviously buying a
house a year ago, and needing to sell today, would not be the greatest
investment.

A house with a $100k loan probably sold for $125k.  Such a house is
likely to be 1-2bdrms, and rent anywhere from $500 to $1000, depending,
of course, on location.  Here in So.Calif., that house is probably a 1
bdrm condo, renting for $600-700.  For 746 effective dollars/month, you
can own instead of rent.  Finding a $646 rental will be a lot easier 
than finding a $125k house in So.Calif. (and you might even get another
bedroom).  You then could put $100/month into a CD.

So, it's your call.  You have to work out all the computations for
various scenarios to find out your best bets.  It ain't a simple as it
used to be.  All "rules of thumb" have to be re-worked.

-- 
The Chipmunk.
Opinions are mine, void where prohibited, taxed, licensed or regulated.
Due to circumstances beyond your control, you are master of your fate
and captain of your soul.
Newsgroups: misc.invest.real-estate,misc.forsale,chi.forsale