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I have young people all around me talk about how they are tired of 'wasting money' renting. Many of them are getting ready to buy a home.
No one wants to hear that buying a home isn't necessarily financially smarter than renting.
By the time you pay for the home, the interest on the mortgage, the upkeep, the property taxes...you are well above the sales price (plus most of these people will take years to have equity in it)...then when you sell it, here goes 6% right of the top to the real estate agents...I mean, your house has to appreciate A LOT for this to make financial sense.
Maybe this is a matter of math that you're not getting, but prior to buying the house, I had NO deductions besides the standard personal. I couldn't break past the standard to get to line item with other things (purchases, health care, etc). And I was phased out from others. I can't file as a couple. The standard is $5950 for a single person.
As I understand it, you can't deduct sales tax unless you're itemizing. And it's pointless to itemize until you can itemize over your standard deduction. Hence, it was not worth it to me to itemize until I had a large deduction like my property taxes.
stan , you still are not following. you are not getting anything extra on anything you previously had if what you previously had if it did not come to more than 12,200.00
you are saying everything you had was below the standard deduction of 12,200 prior to buying so you got the 12,200 deduction instead of what yours came to.
all that is still below 12,200 then regardless if you buy a house or not.
it is only on the amount above 12,200 that you are seeing any additional deduction on. if you now have an additional 12k in interest and taxes then you had before
you now have 24k in itemiized deductions instead of 12k prior before buying . the only difference is that which is above the 12k which you had previous anyway.
it has no effect on what you had prior .
what you are doing is playing with the stacking order in your mind.
you are taking the 12k in deductable home expenses and adding all your other deductions on top and are going see now i can deduct them. but in that scenerio then its the first 12k in home expenses that gets eaten up by the standard deduction anyway so you get nothing extra .
all you need to do is total up all your itemized deductions, subtract 12,200 and that is what the difference in your taxable income will be.
maybe someone else can explain it to you better.
Last edited by mathjak107; 04-22-2013 at 02:54 AM..
stan , you still are not following. you are not getting anything extra on anything you previously had if it did not come to more than 12,200.00
you are saying everything you had was below the standard deduction of 12,200 prior to buying so you got the 12,200. deduction instead of what yours came to.
all that is still below 12,200 then regardless if you buy a house or not.
it is only on the amount above 12,200 that you are seeing any additionl deduction on.
Not 12,000.
~6000.
And I couldn't get above it without the house.
well then the first 6k in deductions it does nothing for. same effect.
add up all your deductions. if they are less then 6k now they do not become worth anymore when you add your home expenses. they still fall under the standard deduction amount.
only the part being added by the home expenses make any difference.
you got 6k in deductions without the house and can't itemize , you add 12k in expenses from the house.
the only difference you will see is 18k in itemized expenses less the 6k standard = 12k. that is the part representing the additional expenses from the house.
you are not being compensated 1 penny more for that existing origonal 6k you had.
phew!. finally. but the important thing is you now understand how it works.
in your mind you were stacking your origonal deductions on top of the new deduction for the house and thinking wow i can deduct it all. but no , it still only effects the part above the 6k .
for a couple it is even harder to clear and that is 12k.
it is all just a case of adding up all your itemized deductions and subtracting out the standard deduction you get anyway. that will be your difference in deductions.
what you were thinking is very very common and one we hear all the time in the forums when folks go i need deductions so i will buy a house.
duh!....
it is very difficult to compare renting and buying because there are to many variables , scenerios and outcomes .
what you get on the money you invest and dont tie up in the house as well as the major repairs and renovations you make have a big difference in outcome.
quite frankly your housing costs are expenses ,period.like buying a car you get what you want and what suits your lifestyle.
there is no difference in cash flow at retirement between a homeowner who pays off a mortgage and saves 1500 a month or a renter who moves from a 3 bedroom apartment to a one bedroom apartment and saves 1500 a month as their lifestyle with no family living there anymore dictates.
it is almost impossible to debate rent vs buying because of the variables. the only thing you can debate is those mis-informed folks who spew renting is throwing away money.
i can assure you it is not as long as you invest the differences in the early years elsewhere.
Last edited by mathjak107; 04-22-2013 at 03:38 AM..
Its not that hard. You own principle residence (P). You pay off your mortgage/part of your mortgage. Then you take another mortgage out on P to help buy rental property (R) thus you continue to be able to deduct mortgage interest without having to worry about stuff like limitations on losses.
Either that or you own starter home (S) and you want to upgrade after you finish paying your mortgage/part of your mortgage and want to move into bigger house (B) without selling S and thus take out a mortgage on B w/o using the equity in S same thing.
It is a valid strategy, but preserving the deduction is only a side benefit.
Location: Chapel Hill, NC, formerly NoVA and Phila
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I'm not an accountant so I'm posing this as a question rather than a statement. Can someone take mortgage interest deductions to lower their income so that they are in lower tax bracket for capital gains? Or is the capital gains percentage decided before mortgage interest is deducted. My other question is whether it could affect if you qualify for AMT? Again, not sure at what point they determine that - adjusted gross income (AGI), modified AGI (MAGI), etc.
ETA: I just looked up the AMT, and it appears that the AMT was created so the wealthiest people couldn't reduce their income by mortgage interest and property tax deductions. They must be added back in to calculate an alternative minimum tax.
since you are taxed at a marginal rate it would not really pay . you would spend more in interest then you could recover.
the heavy deductions could trigger the amt if it drops you to far down. the amt kicks in at only 75k for married couples and around the high 30's for singles. it can hit more people who are not wealthy then you think.
it is triggered by a combo of deductions and income..
you have to play with the numbers but the deductions bringing your capital gains rate down are going to be not common at all.
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