The Single-Family Home Tax Shelter Myth

Discussion in 'Economics' started by Martin Gale, May 2, 2006.

Does it pay to purchase a house for a tax shelter?

  1. Yes, thanks uncle sam

    18 vote(s)
  2. No, better off investing

    33 vote(s)
  1. Question: Does it pay to purchase a house for a "tax shelter"?

    U.S. median home price: $232,500 (Mar '06)
    Down payment: 20%
    Loan amount: $186,000
    Interest rate: 6.13% (Mar '06)
    Term: 30-year fixed
    Total interest paid over 30 years: $275,609

    Average annual interest paid: $9,187
    Average annual interest deduction: $2,756 (30% tax bracket)
    Difference: $9,187 - $2,756 = $6,431

    Answer: The interest payments are much greater than the interest deductions. The notion that a home is a tax shelter is a myth.
  2. Hey nice post and simple arithmetic that a simpleton like me can understand.

    One thing you didn't factor in is appreciation, minus realtor comm when sold, which need to be considered for the big picture.
  3. There is not any tax savings as you cannot itemize in America if you under that threshold...or you can if your a dummy...its a myth...but prices in California put everybody into the "itemize category"...

    The other benefits of home ownership are off topic of this thread...

    With the flattening of appreciation, renting can be a better financial decision in some overheated area's.

    Thanks Marten for the thread You are absolutely right in you thoughts and assumptions.

    I have never purchased something for the sole purpose of a tax deduction as the day's of "paper write off leverages" are over...

    Just make the money and pay the tax...and live within your means.

    Michael B.
  4. Hamlet


    Real estate functions better as a tax shelter if it is investment property with rental income.
  5. Not only appreciation, you forgot about people earning 6+ figures each year. Paying cash for an upscale house could pay off big later down the road.

    No interest to be paid out if there's no mortgage. Figure an avg year sees 4% - 10% in appreciation, even in down housing markets homes usually appreciate.
  6. Not single family homes...unless your trying to cheat and get a portion of your your rent under the table. I have to penciled this out over and over each new tax year and trading is just better.

    Don't forget down time in between renters...thats the biggest expense! Apartment buildings are better than single family homes.

    I am not talking about rehab project or fire sales...ok?

    Michael B.

  7. Hamlet


    I didn't mean it was better than trading, just comparing to a primary non-investment home on the basis of potential tax benefits for a savvy person.
  8. Actually its very simple...if you can rent for less than you can purchase a home then rent. Example. SIL is looking at homes in the 1.2mil range in LA. He finds he can rent home that owner is trying to sell for that for under 7G's a month. that is cheaper than the mortgage for a 1.2 mil house. Makes good sense to rent for a year and see what the housing mkt does in LA

    OTOH in another city he can put a sm amt down a buy a beautiful home for fam for around 200K and rent is abt the same for less brainer he buys! Can do a sch A and write the shit out of everything else.

    IT all depends on the market you are in and what the rental vs the buy costs are and if using a sch A allows you to write off anything.
  9. mss


    The interest you pay is on a declining principal amount and is usually, at least partially, deductible. The appreciation is compounding and based initially on the full value of the house, not the outstanding principal. The appreciation is not currently taxable and may never be taxable. If it is taxed and the law doesn't change, the rate would be very low. As a result, while home ownership can cause liquidity problems, the tax treatment and the historic increase in home values usually make ownership a much better economic proposition than renting.
  10. The way I always thought of this is that the interest payments are tax deductible.

    The "tax shelter" comes in when you sell. Currently married tax payers pay no tax up to $500K in gains after two years. That would be tax shelter wouldn't it?:)

    #10     May 2, 2006