Q. I am deciding if I would be better off financially by renting or buying a home. How do I do the calculation?
A. It is really simple. If you bought a $500,000 home your property tax would be around $6,500 a year. This is totally tax deductible. If your payment was $2,500 a month the majority of your payment at first is interest. Let’s say $2,300. That is $27,600 a year. Adding $6,500 and $27,600 equals $34,100 total deduction.
If your taxable income is $75,000 you would pay tax on: $75,000 minus $34,100, or $40,900.
If you have a 28 percent income tax rate your tax would be $11,452 instead of $21,000 for $75,000. If you divide the savings over 12 months, $21,000 minus $11,452 equals $9,548; $9,548 divided by 12 months is a $795.66 a month savings. It would make your effective payment $1,704.34.
Most rents these days are higher than this in our area. A couple of other things you should consider: In the first year many of your closing costs are also deductible. The other factor is appreciation of value. You will keep paying the same payment when your property value increases over the years. I guess this is part of the reason that home ownership is the American dream.
Q. Our family wants to sell our house. We don’t want to buy another home for some time. I am worried about capital gains. Do we have to roll over our gain into a more expensive house to defer the capital gains?
A. The law you are referring to was in place until 1997. That year a new and better exemption for capital gains became the law. If you meet certain criteria, $250,000 for a single person or $500,000 for a couple, you may be exempt from taxation. Here are the criteria:
1. You have lived in the home as your principal residence for two out of the last five years;
2. You have not sold or exchanged a primary residence during the preceding two years;
3. You meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency.
The way you calculate gain, start with what you paid for the property originally. Add your costs of purchase, your cost of current sale and cost of improvements over the years. Improvements such as repairs or cosmetic additions such as new carpet and paint don’t count.
For instance, if you paid $300,000 in 1990 and sold this year for $500,000 the initial gain would be $200,000. If costs of purchase were $3,000, costs of sale were $18,000, and cost of improvements (such as a new deck, landscaping and kitchen expansion) was $70,000, that equals $91,000. You would add $91,000 to the $200,000 gain, so your total base would be $291,000. Now, subtract $291,000 from $500,000 for a total gain of $209,000. This is well within the exemption for even a single owner.
You don’t have to buy again to receive this and you can do this again every two years.