DEAR BOB: Several times you've mentioned the tax benefits of buying a home. Please explain more. I know mortgage interest and property taxes are deductible. But I would like to know how much this saves me in actual tax dollars. Peter M., Alexandria.
DEAR PETER: Your question gives me an opportunity to show how to evaulate a contemplated home purchase to compute your true housing cost.
For illustration, let's assume you are buying a $100,000 home with $20,000 cash down payment and an $80,000 mortgage at 12 percent annual interest for 30 years. I'm also going to assume the annual property taxes are $1,000 and that you are in a 30 percent combined federal and state income tax bracket.
1. Your monthly mortgage payment will be $1028.63 of which about 99.6 percent or $1024.52 per month will be first year tax deductible interest. The monthly property tax is $83.33.
So your total monthly mortgage and property tax payments are $1111.96 of which $1107.85 are itemized income tax deductions. If you are in a 30 percent income tax bracket, these deductions save you about $332.35 in income tax dollars, thus reducing your monthly housing cost to about $779.61.
2. Each month you will be paying off your mortgage balance. In the first year, this payoff is only about $4.11 per month, but it gradually increases each month so the mortgage will be paid off in 30 years. $779.61 minus $4.11 brings your monthly housing cost down to about $775.50.
3. next, consider your home's appreciation in market value. As you know, homes are considered an outstanding inflation hedge because they usually appreciate in value at least at the inflation rate.
Let's be conservative and presume your home will go up in market value only 5 percent per year on the average.
Five percent of $100,000 is $5,000 value appreciation per year of $416.66 per month. Subtracting this from $775.50 gives us an estimated net monthly housing cost of $358.84. Of course, there will be hard to estimate repair and insurance costs of perhaps $100 or $200 per month.
But after considering your income tax dollar savings, the equity build-up on your mortgage, upkeep costs, and the market value appreciation of your home, it is usually much more profitable to own your own home than it is to rent.
For further details on home ownership tax benefits, see your tax advisor and send for my special report "How to Get the Greatest Income Tax Savings from Your Home."
DEAR BOB: My sister and I own our house jointly. If we sell it and take the one-time $100,000 home sale tax ememption, will we both be considered to have used up our privilege? How can we arrange for one of us to preserve hers? Ms. H. F., Chevy Chase.
DEAR MS. H. F.: Each qualified principal residence co-owner who is not married to another co-owner may elect to exempt from tax up to $100,000 of home sale profits.
In other words, if you and your sister both claim the exemptions, you can each get $100,000 tax exempt home sale profits. However, co-owners married to each other get only one $100,000 profit tax exemption.
So you could elect up to $100,000 tax exemption on your share of the profit and your sister could elect to save her exemption for later use by paying tax on her profit share. This assumes you are 55 or older and have owned and lived in your principal residence at least three of the five years before sale. For details, see your tax advisor.
DEAR BOB: You've helped so many people with their realty problems I hope you can help us, too. When a home mortgage is assumed by the buyer, is the original debtor cleared of all responsibility? I have heard that the person who originally borrowed the money is still liable for any loss if the new homeowner defaults. It this true? -- Sylvia T.
DEAR SYLVIA: If a property buyer assumes a mortgage, the original debtor is secondarily liable in the event of a default.
In other words, if the assuming buyer doesn't pay and the lender suffers a foreclosure loss, the original borrower can be held liable for the loss. So, it is important for a seller whose buyer assumes his old mortgage to insist that the lender release the seller (original borrower) from further liability on that mortgage.
Leners love to have buyers assume old mortgages, often at increased interest rate and for a loan assumption fee. But they often "forget" to release the previous borrower from liability. Such release of liability is especially important on FHA and VA home mortgages in case the original borrower wants to obtain another such mortgage in the future.
But if the home seller is not released of further liability by the lender after his buyer assumes the mortgage, it's usually not a tragedy. The reason is that most homes go up in market value so fast that chances of the lender suffering a loss if foreclosure occurs are very remote. Only if the lender incurs a foreclosure loss would the original borrower have any liability if he had not been released of liability.