Thread: Property taxes
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Old 12-08-2020, 12:42 AM   #50
MAXUM
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Originally Posted by jeffk View Post
Here is another way to think about this that takes all the complicated calculations out of the way. When you rent, the owner has all the costs involved that you would if you owned the house. The rent he charges you will recoup ALL his costs PLUS he will want to make a profit, let's say 5%. Your extra cost while renting is his profit margin. This extra cost is money that you cannot invest in your 9.5% return investment. You are paying a "middle man" and that always adds expense; to you.

For argument, lets accept rent on a single family, 2 bedroom home worth $300,000 is $2500/month. At a 5% markup, you are paying ~$125/mo./$1500/yr. profit to your landlord, money that as an owner you would NOT have to pay. You would also lose $142.50 (9.5%) on not being able to invest this money = $1642.50 lost per year x 30 years (life of a mortgage) = $49,275 lost at the end of 30 years. This ignores compounding effects so it's really far worse than that, a quick spreadsheet calc for compound losses came up with $120,000 after 30 years. PLUS, at the end you have no asset while the owner has a $300,000+ value escalated asset. PLUS+, the above treats rent as fixed while it certainly will NOT be vs. the owner has a fixed, predictable mortgage. PLUS++ at the end of 30 years if you rent, you would still be paying an ever increasing rent while if you owned, your mortgage would be paid off. That's a nice perk as you head toward retirement and a decreased income.

I don't care how you work your numbers. If you come to the conclusion that paying a middle man landlord will be cheaper than owning yourself and building an asset in value, you are missing something BIG. Your rental costs will be the same as his PLUS his profit. Your rent also gains you NOTHING permanent while it funds paying off his mortgage and building his asset value which is also increasing due to inflation. He meanwhile gets to charge you inflating rent prices.

Oh, BTW, when you get around to selling your house (primary residence), you can write off $250,000 ($500,000 joint return) of capital gain on your federal taxes. Try THAT with your 9.5% investment. FURTHER, you can do this every 2 years. Over time, you could shelter $$millions of home value growth from capital gains taxes. $2 million sheltered @22% tax (or more) would save you $440,000. Project that back 30 years and it is worth almost $15,000 per year! As a renter, you get ZIP when you change apartments.
There is one really bad assumption in all this and a few things that are not part of your calculation.

First to the assumption that the property can actually fetch rent above and beyond what the total cost of ownership is plus a little extra. That is not always the case. In time that is likely to be true but not a forgone conclusion. I have known a few who have dabbled in this and none have been able to recoup all of the carrying costs - however for the owner of a rental, even if you're throwing in the difference it's still buying a house at a substantial discount as the bulk of the property is being paid by the tenant.

So back to your example of a 300K house. For a person looking to buy... let's look at all the costs associated with buying that property. A 300K mortgage at 3% will fetch a total interest payment over the life of the loan of $155,332. That is a net loss to the owner. Now let's take an average tax rate in NH - I chose to use $25 per thousand per year based on a 300K assessment. That comes out to $7500 per year. Now it's really hard to calculate what that will do over the course of 30 years but you can bet on two things. The assessment of the property will increase as will the taxes paid. My property taxes have increased 5X's over in 20 years. Since I can't really accurately calculate that, let's say it remains at that $7500.00 per year. After 30 years that comes out to $225,000. So between the interest on the loan adding a fixed tax burdon which we know is never going to happen I'm still at $380K to hold that property for 30 years. Even if the property were to double in that time frame what you essentially have is a net loss of 80K. This does not include any upkeep which also is a huge variable but let's say the house such as mine started out as brand new and nothing elective was done far as improvements go, just upkeep, add in the cost of a roof, interior floors, paint, appliances etc... that all would need to be replaced during that time period. It further erodes that number eating into the principal cost of the house. So yes at the end of the day you may in this illustration end up with a house that is worth 600K but it cost you how much to have it during all that time of ownership?

To me it's a wash if renting the landlord passes off the cost of repairs and upkeep to a tenant via rent, if you own the same still needs to be done and sucked up by the owner. The only difference is the renter is paying a smaller amount monthly to cover this where as the owner to say put a new roof on, put in new appliances, refinish floors, pave the drive way, paint the house or whatever will do that in a lump sum when it is done.

As also mentioned before - yes there is the ability to write off some interest paid as well as some property taxes, but all this does not erase the fact the money is paid out. So writing off 10K a year in property taxes doesn't mean you never paid 10K in taxes, just that it wasn't used for that purpose after it has already been taxed as income.

If you happen to live in the house for a lifetime (most do not) and after 30 years it is paid off and thus free of principal and interest, it will take a long time to start making up for all the money lost in the 30 years of prior ownership and doesn't erase the never ending annual tax bill to hold it. However it is true that entering into retirement with a house that is paid off is certainly beneficial when faced with a smaller fixed income.

Now speaking of cap gains on the house when sold, hell you should get that tax free considering how much has been spend already in property tax and interest which in every calculation that I have done typically far exceeds the amount of gain of the property over the period of time of ownership. All this is doing is preventing you from being taxed yet again on the value that has already been lost to the aformentioned.

In low property tax states holding property can be a better asset as the total cost to hold is less. Of course that only means the tax burden per capita is collected from other sources such as income, sales, cap gains or other broad based taxes.
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