More Will Choose To Rent In The Future As Tax Breaks Decline

Reprinted with permission from the author, John Burns

If you rent property to tenants, the outlook for your business and future rental customers is continuing to get better and better. While your apartment and single-family home tenants know that renting has always offered more flexibility for them, the great tax benefit of homeownership is not what it once was.

Real Estate Consulting

More renters are realizing that homeownership does not provide the tax breaks it once did and that renting is a better deal for them than owning, according to a new study from John Burns Real Estate Consulting.

“We believe we have found one of the primary reasons why entry-level home buying has not recovered—and why homeownership has been plunging,” writes John Burns in his market intelligence report. “For decades, homeowners benefitted from both the financial and psychological benefits of paying less taxes. Homeownership came with income tax savings because mortgage interest plus property taxes easily exceeded the standard deduction allowed by the IRS,” Burns writes in the report.

For Many The Tax Savings Is Gone

For most American homeowners that has not been true since 2008 because:

• Falling interest rates and home prices have reduced mortgage interest.
• The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers.

“Today, a typical first-time home buyer financing 95% or less of a median-priced US home pays less than $12,000 in mortgage interest and property taxes, which is not enough to warrant itemizing. Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal,” Burns writes in the report.

Rent vs. Buy

“Years ago, we eliminated income tax savings from our calculation of the rent-versus-buy decision, and I cannot remember the last time I heard a prospective first-time home buyer (not in California or New York) mention income tax benefits as a reason for buying,” Burns says in the report.

In the graph below, “We show the change over time for a typical homeowner couple with an 80% loan-to-value mortgage and a 1.5% property tax rate on the median-priced US home. That owner paid mortgage interest and property taxes in excess of the standard deduction every year from 1972 to 2008. Today, that homeowner’s deductions fall nearly $2,500 short of the standard deduction.”

Every April 15, the most financially qualified renters in the country used to feel the pain of not owning by writing a check to the IRS.

For most, that is no longer the case. The lack of tax savings is just one of numerous reasons why homeownership is the lowest it has been in decades, and we believe homeownership is headed lower.

Homeownership Headed Lower As Renting Becomes The New Normal

“This is just one of many findings in our upcoming book, which will be published later this year, called Big Shifts Ahead: Demographic Clarity for Businesses,” Burns writes.

The Urban Institute said last year in their analysis “The homeownership rate in the U.S., which has been declining since the housing boom, will continue to decrease for at least the next 15 years. The reason is simple: in the millions of new households forming over the next 15 years, new renters will outnumber new homeowners—causing a sustained surge of rental housing demand that will significantly affect millennials, seniors, and minorities, and expose important gaps in our current housing policies.”

This article courtesy of John Burns Real Estate Consulting. If you have any questions, please contact John Burns at (949) 870-1210 or at jburns@realestateconsulting.com

About The Author

Before founding John Burns Real Estate Consulting in 2001, he worked at a national consulting firm for 4 years and for 10 years at KPMG Peat Marwick – 2 as a CPA and 8 in their Real Estate Consulting practice. John has a B.A. in Economics from Stanford University and an MBA from the University of California, Los Angeles, and works in our Irvine office. John has attended home games for all 30 major league baseball teams, seen every Academy Award-winning Best Picture, and regularly runs the hills in Southern California.

 

Are your properties inspected regularly, with the latest technology?

If you are looking for a property management company that walks and inspects your properties and provides you with clean, up-to-date information and reporting, Power Property Management (PPM) is here to help. We utilize a reporting system that gives our clients easy access to view reports whenever they may need them—at home or on their mobile devices.

• We use the latest technology to provide our clients with reporting that includes photos, videos, checklists and comments that capture the tiniest of details of the condition of their property.
• Buildings are inspected on a set schedule and dated by the PPM supervisor to track accountability; everything is always documented.

If you are tired of less-than-adequate inspection procedures and documentation, please call us at 310.593.3955 ext. 23 or request a proposal online. We are here to decrease your stress and make managing your property as easy as possible.

Buying a Rental House with Your 401k

If you need cash to finance the purchase of an investment property, you may be considering taking out a loan from your company 401k. About 75% of 401k plans have loan provisions, and 20-30% of people who have this option take advantage of it. However, while it’s great to have the option, taking a 401k loan can have serious and financially unfavorable consequences. In a nutshell: only consider a 401k loan if you have no other options, and if there’s no chance you’re going to go bankrupt or change jobs.

401k Loans: The Basics

Not all employers offer 401k loans, and some that do only allow them for specific reasons, such as to purchase a primary residence, prevent eviction from your home, pay for college, or cover medical expenses. The interest rates on 401k loans are typically quite good—often a percentage point or two above prime; however, your company has the discretion to set the rate. Federal law allows participants to borrow 50% of their vested balance, up to $50,000. Unless used to purchase a primary home, most loans must be paid back within five years; payments are made through payroll deductions. Some plans don’t let you make any contributions to your 401k until the loan is paid back, but most plans will allow you to accelerate your repayments.

401k Loans: The Downside

Generally, financial advisers say that taking out 401k loans is a bad idea for several reasons. Here’s why:

• You don’t earn returns on the loaned money during the loan period, effectively costing you money. Most experts believethat on average you double your invested funds every eight years; but you can’t double your money on the amount you withdraw for the loan. And consider this: you probably won’t double your money with a real estate investment in eight years.
• If your job ends (either you leave, or you are terminated), you have to repay the loan within a short period, typically 60 days. If you can’t, the unpaid balance will be considered an “early withdrawal” and you’ll have to pay a 10% penalty (if you are less than 59.5 and declare it as income).
• You have to repay the loan with after-tax dollars, which means you lose a tax benefit.
• Although some plans allow you to continue making contributions to your 401k during the loan period, you may need to make them smaller because of the loan payment.
• If you are in danger of bankruptcy, the money you have in a 401k is protected; however, any money you have borrowed ona 401k loan is not. If you are in danger of filing for bankruptcy, leave your money in the 401k.
• Former employers are unlikely to allow you to take a loan from a 401k that was funded while working for them.

401k Loans: The Upside

While there are plenty of drawbacks to 401k loans, there are some benefits:

• Any interest you do pay on a 401k loan goes back into your 401k account.
• 401k loans are convenient—no credit check is required, and often all you need to do to arrange for the loan is pick upthe phone or complete a short application.
• Interest rates are typically low, and you pay the interest to yourself into the account, which means that it’s tax sheltered.

Be Informed and Realistic

While 401k loans may seem like a good idea, most experts say that if you are considering this type of loan, it’s a sign that you’re probably living beyond your means. Because you can expect to double your money invested in a 401k in about eight years, you?re probably better off leaving the money in your 401k and trying to borrow the money from another source. Also, don’t take out a 401k loan if you may change jobs or if there’s a chance you’re going to declare bankruptcy as the financial consequences could be very unfavorable.

• What is Power Property Group? Power Property Group is the synergy of two businesses, PowerHouse Team and Power Property Management combined to take care of ALL your real estate and property management needs.

• Power Property Management? Full service management company dedicated to providing the best service available in the property management industry. We focus on helping our investors determine their goals and develop plans to achieve them. http://www.powerpropertymanagement.com

• PowerHouse Team? A seasoned group of real estate consultants to be help with your real estate goals. The Powerhouse Team works with first time home buyers or the most seasoned investors to exceed ALL your real estate needs. http://www.thepowerhouseteam.net