5 Reasons it still makes sense to buy a home:
By Jeff Diercks, CPA, Tampa Fl
President Obama has proposed a cap on the deduction for mortgage interest for high income taxpayers and a rollback of the recently extended Bush tax cuts.
According to CNNMoney, “under his proposal, taxpayers in the 33% and 35% tax brackets would only be able to deduct their mortgage interest payments at the 28% rate. It would affect those with taxable income of $250,000 and up and bring in $321 billion over 10 years, according to the White House.”
Here are 5 reasons why purchasing a home still makes sense:
1. Banks have, in general, raised home equity requirements on new home purchases, thereby reducing the overall loan to value on such properties. In other words, loan amounts are generally smaller and therefore interest costs are lower.
Congress is also proposing a plan whereby mortgages with 20 percent or more down payments are deemed safe and therefore saleable. This will push lenders, who do not want to hold mortgage paper on conventional loans, to seek larger down payments from new home buyers, further reducing mortgage loan sizes.
2. Property values are down and mortgage rates are very low historically. Once thought of as unthinkable, property values have declined 30-50% across the country, again reducing loan sizes on new properties.
This means home values, and therefore home mortgage loans, are likely to be smaller than earlier in the decade and could stay lower in the near term. This makes a cap on mortgage interest deductions less meaningful.
3. The President’s proposals do not target the mortgage interest deductions directly; instead it caps the rate of all itemized deductions for the wealthy. So with some clever tax planning, deductions can be prioritized and transactions structured to minimize the effect of such limits.
Under the President’s proposal, married taxpayers with adjusted gross income greater than $250,000 would normally see a $35.00 benefit for every $100 in itemized deductions but instead under would receive only a $28.00 benefit for every $100 in itemized deductions. The benefit is smaller, but smart taxpayers will find ways to augment these itemized deduction limitations by accumulating deductions in some years for such things as charitable deductions, while in other years deducting very little of such costs to stay under such limitations.
4. Such legislation would only affect about 2% of home buyers. According to a 2009 study by the Realtor’s Association, an analysis of Internal Revenue Service data found high-income taxpayers who claim the mortgage interest deduction comprise about 2% of all tax filers, according to the Los Angeles Times. This is just a very small subsector of the entire real estate market
5. The wealthy generally don’t carry a mortgage on their homes. I don’t have empirical data here, but from my experience of working with the wealthy and the ultra-wealthy for over a decade, the wealthiest 1% (and maybe 2%) do not carry mortgages on their homes anyways.
So the bottom line, is that you have to live somewhere and, even if Congress and the President cap interest rate deductions via a limitation on itemized deductions, it will have very little affect on the average new home buyer in Tampa or nationally.
Jeff Diercks, CPA is Managing Director of InTrust Advisors, a boutique wealth management firm helping busy, affluent individuals achieve their goals and dreams through a unique planning and investment process that allows them to profit in almost any market environment. You can find out more at www.InTrustAdvisors.com.
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