Monday, November 13, 2006
Beware of...
Consulting experts. I say this because I had some friends read my most recent post on home buying and I'm more confused than before I wrote the post. Simply stated, one person said that those who bought homes in '82 are no better off and really made no money after inflation. Another one said the calculations of the first guy were off by a considerable amount and I should check the CPI tables. Fair enough, I thought, so here goes: http://www1.jsc.nasa.gov/buy/inflateCPI.html states that a purchase of a home in Croton at 160000 in 1990 would be 231200 in 2004. On this level people did make out by quite a bit, as 2004 was near the aforementioned peak. The highest price received for the 160,000 home was approx. 550,000. In terms of pure exchange, those who sold at market highs did make out quite well. Let's use the above figures and say someone made $390000. Stated in this way, the second opinion is by far the more correct one. Of course, that is not the whole story.
Living expenses, whether you buy or rent, are replete with "dead money", i.e. bills that are neither recoupable nor tax deductible. The rent on your primary residence is almost always dead money, although if you have a home office, you do get a small deduction. We'll go into that a little later. However, you are not normally responsible for most upkeep, and taxes are diffused to all renters in a particular location. Heat and hot water can also be included in one's rent, so this is covered as well.
Although home owners are, in a sense, paying themselves as they build equity; there is plenty of dead money here as well. The two most common examples (but by no means the only ones) are taxes and maintenance. Property taxes are a large concern here in Westchester, and that 500,000 home can come with a $7000 a year tax bill. This tax bill didn't begin at $7000, of course, instead steadily increasing over time. In case you wondered how Westchester had all these highly ranked schools, now you know. We bought them. Some of the costs can be lessened by New York's Star program, but you still pay quite a bit. Upkeep on the house is also quite pricey, with estimated costs for the aforementioned home and time hovering around 50K or so. Ergo, we'll say that the combined costs for both as 250K. As such, that nice $390,000 profit is now $140000. Because prices stayed low for some time, those who made out were the ones who bought in 90/91. If you bought earlier, you paid the same, but inflation lowered your profits.
Sometimes I wonder if the best solution is to buy a small cottage and invest the money into the stcok market or other investment vehicles. Actually, the best solution may be living in a tent. I'm not there yet though. Also, caring for kitty would be difficult.
The tax write-offs mentioned will lessen the impact of "dead money," but even this is deceiving. The 25K deduction is not a tax credit, but lowers you adjusted gross income (AGI) instead. E.g.: let's say I'm in the 31% tax bracket; the 25K dedution is then worth 7750 (25,000 x 0.31 = 7500).Even this is wrong on some levels, as it doesn't take into account income tax tiers and progressive income levels. You can strucutre your finances to take more deductions, but rarely do the additions add up to the standard deduction. Ergo, all those exspenses may not be dedcutable on any level. As usual, consult a tax professional.
The upshot to all of this new info is as follows: now is not the time for Karl and myself to buy a home unless something incredible drops into our laps. Otherwise, we wait. Another solution would be to buy something small like a co-op and rent it out after we buy or sell if prices haven't fallen that much. More in the eternal later.
Finally,
Living expenses, whether you buy or rent, are replete with "dead money", i.e. bills that are neither recoupable nor tax deductible. The rent on your primary residence is almost always dead money, although if you have a home office, you do get a small deduction. We'll go into that a little later. However, you are not normally responsible for most upkeep, and taxes are diffused to all renters in a particular location. Heat and hot water can also be included in one's rent, so this is covered as well.
Although home owners are, in a sense, paying themselves as they build equity; there is plenty of dead money here as well. The two most common examples (but by no means the only ones) are taxes and maintenance. Property taxes are a large concern here in Westchester, and that 500,000 home can come with a $7000 a year tax bill. This tax bill didn't begin at $7000, of course, instead steadily increasing over time. In case you wondered how Westchester had all these highly ranked schools, now you know. We bought them. Some of the costs can be lessened by New York's Star program, but you still pay quite a bit. Upkeep on the house is also quite pricey, with estimated costs for the aforementioned home and time hovering around 50K or so. Ergo, we'll say that the combined costs for both as 250K. As such, that nice $390,000 profit is now $140000. Because prices stayed low for some time, those who made out were the ones who bought in 90/91. If you bought earlier, you paid the same, but inflation lowered your profits.
Sometimes I wonder if the best solution is to buy a small cottage and invest the money into the stcok market or other investment vehicles. Actually, the best solution may be living in a tent. I'm not there yet though. Also, caring for kitty would be difficult.
The tax write-offs mentioned will lessen the impact of "dead money," but even this is deceiving. The 25K deduction is not a tax credit, but lowers you adjusted gross income (AGI) instead. E.g.: let's say I'm in the 31% tax bracket; the 25K dedution is then worth 7750 (25,000 x 0.31 = 7500).Even this is wrong on some levels, as it doesn't take into account income tax tiers and progressive income levels. You can strucutre your finances to take more deductions, but rarely do the additions add up to the standard deduction. Ergo, all those exspenses may not be dedcutable on any level. As usual, consult a tax professional.
The upshot to all of this new info is as follows: now is not the time for Karl and myself to buy a home unless something incredible drops into our laps. Otherwise, we wait. Another solution would be to buy something small like a co-op and rent it out after we buy or sell if prices haven't fallen that much. More in the eternal later.
Finally,
