patrick.net

First thing: get yourself one of those HP 10B business calculators and learn how to use the top row of buttons. It makes payment calculations easy for mortgages, car loans, etc.

$1MM - 20% down = $800K mortgage @ 3.7% interest for 30 years. Payment is $3,682.26 per month / $44,187.17 per year (Principle and Interest.)
Interest in year 1 is $29,350. The standard deduction for married is $24,000/ year, but you'll probably itemize for better deductions. That I can't help ya with - Turbotax is your friend.

Property tax of 1.3% on $1MM assessed value = $13,000 / year. But SALT only allows $10k per year deduction. So you would max out the deduction.

If your kids throw themselves in front of a train, or hock themselves (and/or parents) into debt to peer-pressure-attend an expensive school in The East, does the arithmetic matter?

Tim Aurora says

VINCENT says

Expect SALT cap to be lowered in the future too if Dems actually impeach and in the backlash Trump is re-elected and the Dems lose the House. GOP might even add a sales tax on house sales for amounts above $500k. That wil hit blue states/big cities big time.

Payback is going to be a royal bitch.

That will also hit all the Floridians , a toss up state.

How much do you think homes in Tampa, Jacksonville, Orlando, and Tallahassee are selling for? The issues OP presents almost entirely deal with places far more expensive than Floriida.

CovfefeButDeadly says

Tim Aurora says

VINCENT says

Expect SALT cap to be lowered in the future too if Dems actually impeach and in the backlash Trump is re-elected and the Dems lose the House. GOP might even add a sales tax on house sales for amounts above $500k. That wil hit blue states/big cities big time.

Payback is going to be a royal bitch.

That will also hit all the Floridians , a toss up state.

How much do you think homes in Tampa, Jacksonville, Orlando, and Tallahassee are selling for? The issues OP presents almost entirely deal with places far more expensive than Floriida.

That and there's no income tax in Florida. So the whole SALT thing really ain't a deal for them outside of the super wealthy who literally could give zero shits about their property taxes. It's the "woke" people making $150-200k a year with $20k income and property taxes in IL, NY, CA, NJ, etc that are getting buggy whipped. The SALT cap was put in place to piss off people he knew were never going to vote for him anyway. OR get them pissed off enough to "woke" them up to the reality of the states they live in and their awful taxing policies.

The SALT tax cap doesn’t apply to mortgage interest deduction. It’s a separate thing. So you’d get your write off, putting your solidly past the standard deduction, but then you’d have property tax which would be $3000 more than the SALT cap, and so that’s maxed out before you even get to income tax etc. I think you just add $10,000 to the interest deduction for $39,000 total deduction. From there on you’d be looking for 1)tax credits for having kids or paying for child care, 2)charitable contributions, 3)any market losses or gambling losses.

Deductions on interest for mortgages initiated in 2018 or later are capped to the interest only on $750k. That limit used to be $1MM. With your downpayment, your mortgage is only $800k, so that limitation is small. Instead of $29k of deductions, you're looking at maybe $28k.

The big problem is this (as Quigley states): To get the mortgage deduction you ALSO have to itemize, which limits your other deductions to $10k because of SALT cap. So, your total deductions are $38k with the mortgage. If you are married and have no mortgage your total deductions are $24k. That means you are effectively only getting $14k of mortgage deductions. Assuming 24% federal bracket and 9% California bracket, the additional $14k deduction due to the mortgage saves you $14k * 33% = $4620 a year.

For total costs, don't forget you'll be paying for home insurance. Maybe $1k/year if you don't get earthquake insurance, don't live in a flood zone, and don't live in a fire zone.

If you are currently renting, then you aren't paying for sewage, water, or garbage. That can run over $1k/year.

My insurance insisted I replace my aging roof (which was wooden). Switching to a composite roof is expensive because the old roof has to be removed and plywood added. That might be $10k or more.

They should get rid of the mortgage deduction, it just drives up prices. The SALT cap is bogus, it’s double taxation pure and simple.

ignoreme says

They should get rid of the mortgage deduction, it just drives up prices. The SALT cap is bogus, it’s double taxation pure and simple.

Agree, they should get rid of MID. As for SALT cap, all state/local taxes are double/triple taxation, one to the Fed and again to the State/locality. There should be no SALT deductions on Federal returns at all. Any such deduction is the rest of the country subsidizing your tax hungry area.

@SunnyvaleCA

Thank you for the clear explanation.

So it looks like I’d be getting back about $4600/yr by owning....

BayArea says

@SunnyvaleCA

Thank you for the clear explanation.

So it looks like I’d be getting back about $4600/yr by owning....

Plus annual appreciation that is generally more than inflation.

HeadSet says

There should be no SALT deductions on Federal returns at all. Any such deduction is the rest of the country subsidizing your tax hungry area.

Yeah, maybe it’s more fair if the state let’s you deduct federal taxes paid from state income then increase state rates to make up the difference. Problem is we’ve been doing the opposite for a long time and now 50 state legislatures need to pass laws to fix the problem, which they aren’t going to do.

SALT deduction isn’t really a deduction. It’s a necessary accounting mechanism to avoid double taxation. To see the problem, imagine Bernie passes his 97% tax on millionaires without removing the salt cap. Every million I make, Bernie let’s me keep 30K, yet the state still wants 10% of the whole million or 100K. So I’m actually losing 70K which obviously doesn’t make sense and is probably unconstitutional. Sure this is an extreme example but if I can just play with the % and make it unconstitutional then it’s not okay to begin with.

SALT deduction isn’t really a deduction. It’s a necessary accounting mechanism to avoid double taxation.

I disagree here. The Fed and State are two different entities. The Fed has nothing to with the State or Locality adding additional taxes. Now if you want State taxes to tax AGI after Fed taxes removed, I agree. But there is no way high income tax states should be allowed to grab part of Federal taxes through SALT. Also, a wee bit of an economic "moral hazard" with an unlimited SALT inyour example above. Suppose Bernie did do that 97% millionaires tax. Now a State can impose their own 50% or so millionaires tax and let the millionaire deduct this from Federal income tax. We are of course referring to marginal rates.

Blue says

BayArea says

@SunnyvaleCA

Thank you for the clear explanation.

So it looks like I’d be getting back about $4600/yr by owning....

Plus annual appreciation that is generally more than inflation.

You know it’s 2019 right? You mean annual depreciation...

BayArea says

Blue says

BayArea says

@SunnyvaleCA

Thank you for the clear explanation.

So it looks like I’d be getting back about $4600/yr by owning....

Plus annual appreciation that is generally more than inflation.

You know it’s 2019 right? You mean annual depreciation...

Actually, is it going to be a primary home or rental? Didn't see that mentioned. Might get depreciation benefits on a rental. You pay it back later, but if you're earning high income now, could offset some of that tax liability (actually a lot on that priced property depending on income). I admittedly left real estate 2 years ago and have been really bad on staying up with it, so I could be wrong here.

If primary, then I could see some loss in value, but generally owning for 7-10 years you should come out on top. I guess 1998-2002 would have been a bad window, but even then, my guess is it would have still been a gain in most areas.

My point is that after close to a decade long bull run, the next several years is uncertain.

If anyone expects to buy a house today and see equity upside in the next 1-5yrs, they may be in for a surprise.

So it sounds like:

- mortgage interest deduction is not counted towards SALT? But property tax is?

- if I’m a renter, do I have any SALT deduction now?

BayArea says

If anyone expects to buy a house today and see equity upside in the next 1-5yrs, they may be in for a surprise.

Agreed. Can't see much of a correction in most places though. Just stagnant with slight declines.

BayArea says

- if I’m a renter, do I have any SALT deduction now?

State income taxes.

BayArea says

My point is that after close to a decade long bull run, the next several years is uncertain.

If anyone expects to buy a house today and see equity upside in the next 1-5yrs, they may be in for a surprise.

As a homeowner, I agree with this message. Prices have likely peaked in many to most areas and may already be on the way down in certainly bubbly areas. The market over corrected up to the point where ownership isn’t very affordable for most folks. I figure best case scenario is +2-4% annually for total home values. Probably will follow inflation closely.

rocketjoe79 says

First thing: get yourself one of those HP 10B business calculators and learn how to use the top row of buttons. It makes payment calculations easy for mortgages, car loans, etc.

Actually, there is a nice little payment calculator app that is free. Those calculators will be obsolete soon. All of the simple ratios that you can store in them are easily accessible online.

Malcolm says

rocketjoe79 says

First thing: get yourself one of those HP 10B business calculators and learn how to use the top row of buttons. It makes payment calculations easy for mortgages, car loans, etc.

Actually, there is a nice little payment calculator app that is free. Those calculators will be obsolete soon. All of the simple ratios that you can store in them are easily accessible online.

Just search the web for "mortgage amortization." Here's a simple one that gives you graphs and everything: https://www.amortization-calc.com/mortgage-calculator/

BayArea says

Plus annual appreciation that is generally more than inflation.

Out here in silicon valley, a $1MM house is really $300k house and $700k of dirt. The dirt doesn't depreciate. Note that because of regulation and other extreme building costs, a $300k house is probably more like a "shack" — especially if it's 50 years old.

HeadSet says

SALT deduction isn’t really a deduction. It’s a necessary accounting mechanism to avoid double taxation.

I disagree here. The Fed and State are two different entities. The Fed has nothing to with the State or Locality adding additional taxes. Now if you want State taxes to tax AGI after Fed taxes removed, I agree. But there is no way high income tax states should be allowed to grab part of Federal taxes through SALT. Also, a wee bit of an economic "moral hazard" with an unlimited SALT inyour example above. Suppose Bernie did do that 97% millionaires tax. Now a State can impose their own 50% or so millionaires tax and let the millionaire deduct this from Federal income tax. We are of course referring to marginal rates.

People who hate the SALT should consider that maybe their state should allow you to deduct from your state taxes the amount you paid to the feds.

Low interest rates have kind of wiped out the MID on their own. The bucket of people who get any deduction at all are more than paying for it in a higher home price.

SunnyvaleCA says

Or, flip the equation upside down. People who hate the SALT should consider that maybe the state should allow you to deduct from your state taxes the amount you paid to the feds.

Thank you. I had never looked at it that way.

Malcolm says

Low interest rates have kind of wiped out the MID on their own. .

That along with the $24k standard deduction for joint filers.

ALL interest paid, ALL SALT, and ALL theft and losses should come right off of the top of your gross earnings even in a postcard flat tax system. That should be the back side of the postcard. Then the front should a two level tiered flat tax computation. A calculation of a lower tax rate on up to the first million, or the tax rate on a million + a second tier for everything minus the first million.

This should then be offset by a BMI that is paid to everyone but is consumed as a tax liability grows with higher earnings. Then ALL government bureaucracies that manage programs for the poor can be closed down. It is only a matter of time before the wisdom of this system will catch on.

HeadSet says

That along with the $24k standard deduction for joint filers.

Yup. And merging the exemptions, the tax code is now very generous for claiming dependents, even for unmarried people.

This should then be offset by a BMI that is paid to everyone but is consumed as a tax liability grows with higher earnings.

Now that is a good way to rid of welfare. However, it may be psuedo-inflationary as prices will rise to absorb the BMI. I presume BMI means "Basic Minimum Income" or the like, and not "Body Mass Index," and some sort tax on fat people.

Yes. Basic minimum income. No, prices won't go up. In fact, more people will start ventures and competition will actually lower prices and this cycle of a stalled economy of no or broke customers will change into a dynamic capitalist economy.

The reason prices won't go up is basically, nothing is changing other than people having cash instead of restrictive programs. In essence, the idea is take food stamps, unemployment, disability, welfare, health services, all of that and take the benefit amounts and all of the other administrative costs and then just divide it by the population.

People will get more, but the cost remains the same, and is contained. Prices don't go up because older people, or disabled people or people in Alaska get a monthly check. One could theorize that they would, but me personally, I don't see it. In fact, prices go up when some people get an entitlement and then say like in housing, a working family has to compete with a welfare family for the same rental.

People would actually learn the value of money because if they blow it on dumb things, they will have to borrow from friends and family until they pass GO on the next round. It is a beautifully simple concept.

But body mass index is important too. Take care of your health.

Take the government out of the sick care industry and let the private market handle it. Then there basically will be a "tax" on BMI, as fat people will have to pay an additional premium for their insurance (if they choose to purchase insurance).

If we cancelled all other government welfare, I'd be all for Basic Minimum Income. Of all the candidates in the Democratic Clown Car, I'd go for Andrew Yang! Sadly, I know BMI would be rolled out as an additional supplement to the existing handouts promoting bad behavior, thus defeating the only good part of BMI.

SunnyvaleCA says

Take the government out of the sick care industry and let the private market handle it. Then there basically will be a "tax" on BMI, as fat people will have to pay an additional premium for their insurance (if they choose to purchase insurance).

If we cancelled all other government welfare, I'd be all for Basic Minimum Income. Of all the candidates in the Democratic Clown Car, I'd go for Andrew Yang! Sadly, I know BMI would be rolled out as an additional supplement to the existing handouts promoting bad behavior, thus defeating the only good part of BMI.

Solid point at the end, but BMI isn't meant to cure all of life's ills, it is meant as a tool to help people cope with life and to hopefully thrive. BMI would help fat people to be able to afford health insurance, and a healthy person to invent something, or to pay for school. That's the whole point, everyone has different needs and desires and government programs stifle freedom. The cost of covering unhealthy people isn't lower in a socialist single payer model, it would be lower in a competitive marketplace. Shopping standardized services has actually lowered elective and cosmetic surgeries. Dentists are actually cheaper now than in the 90s because they have to compete for fewer and fewer wealthy patients. Conscripting them through DentiCal isn't the way to go. Get the agency out of the way.

In 1984 a car salesman explained to me how I would save money by financing the car purchase. This was because in those days, all interest was deductible from the income.

I remember doing the tax returns. I deducted charge account interest in the calculation of the AGI. Didn't matter what the borrowed money was for. This interest deduction was phased out over a few years in the late 1980's.

I didn't finance the car purchase; I didn't even buy the car from that pr*ck who creeped me out. He was wrong anyway, because the law changed.

Nor would I borrow a huge sum to buy a home under the assumption that the current tax laws (ahem, including Prop-13 tax computation) will be the same for decades to "make it work".

B.A.C.A.H. says

Nor would I borrow a huge sum to buy a home under the assumption that the current tax laws (ahem, including Prop-13 tax computation) will be the same for decades to "make it work".

The difference is that Prop 13 would require a supermajority of the voters to change or repeal it.

Really, it all comes down to this: should I paydown my mortgage or invest in ARLP? What hath Trump's tax reform wrought?

EBGuy says

Really, it all comes down to this: should I paydown my mortgage or invest in ARLP? What hath Trump's tax reform wrought?

This is a historically good time to borrow money to invest. The problem is that the reason rates are so low is a surplus of money and a shortage of productive uses. So, statistically, the safer ways of investing are going to yield returns that are so low that they aren't worth it. It would be a good time to buy real estate, maybe in some places it is, but surplus money has already found its way there and coastal real estate is inflated.

We invest in things like restaurant gift cards, where you can buy one for $50 and you get an extra $10 for free. That's an instant 20% rate of return on money you were going to spend.

OccasionalCortex says

Which I don't see you hollering to get rid of...which means that you really do not care if something is 'double taxation pure and simple' at all. Not really.

Because we weren’t talking about corporate taxes... You admit that double taxation occurs but it’s okay because it happens at the state level? Makes no difference to the people that are screwed.

And to all the people who say it’s not fair to low tax states. What example can you give as a fair deduction? Every deduction benefits some group over others. And if you feel really strongly about the unfairness of the SALT deduction, you can pay extra taxes to your state and deduct the hell out of it.

But yeah, I do agree it would be more fair if states only taxed you on your AGI minus fed taxes paid. But they don’t and never will...

Malcolm says

The difference is that Prop 13 would require a supermajority of the voters to change or repeal it.

It's only a matter of time before a super-majority of voters who are not benefiting from Prop-13 outnumber the old geezers and their entitled kids who do benefit.

When that happens, you can bet your butt the government employee labor unions will start the process of undoing or changing Prop 13.

Prop 13 entitlements causing to stop functioning in the normal market economic cycle. Houses passed on to (mostly young) kids through trust to lock in very low tax rates to keep the Prop 13 entitlements. Once the kids are out from that area for college/jobs, there are no new kids found around as construction stalled by Prop 13 entitlement beneficiaries.

You can see its effects, now some of the south bay towns are lacking enough school-age kids to keep continuing the running schools. Real estate/rent seeking folks are manipulating relentless school districts to allow kids from nearby towns or sometimes they drive school buses around to facilitate keeping schools open that otherwise should be shut down to save valuable government resources. They also use the trick "if the parent/garden/care taker" "work in the town" you kid is allowed to attend.

This is a remarkable change that it is exactly the opposite few years ago that one has to provide tons of documents to prove that the kid is living locally within the school boundary map.

In one of the posts Patrick mentioned that back then, one of the basic ideas (not spelled explicitly) of Prop 13 entitlements/benefits is to send own kids to private schools and do not depend on public schooling as the government is limited in getting funds from property taxes. Fast forward, we are back to square one where people still expect public schools to function including filthy rich areas who are more desperate now!

That is the power of entitlements/benefits.

BayArea says

Hi guys, let’s assume the following

- SALT deduction limited to $10k/yr
- prop tax rate is 1.3%
- home purchase price: $1M
- 3.7% interest rate
- 20% down

Can anyone walk me thru the math on what my payment will be annually with tax benefits included

Thanks

Depends on your HH income and filing status. If you can afford an $800,000 mortgage you are probably at least int he 32% bracket so the 32% of $10k is $3200. For all practical purposes a drop in the bucket relative to the monthly payment.

1) The SALT cap has screwed many of us.
2) If your buying the house for a tax break your doing it wrong.*

*as an individual. If your a cooperation investing in a "economical disadvantage" area that's an entirely different conversation.