May 14th, 2009 9:16 AM by Lehel Szucs
Given recent changes in home prices and the current low mortgage rate climate, there have been significant gains in affordability for prospective first-time homeowners. Earlier in 2009, a provision in the Stimulus Bill provided for a first-time Homebuyer Tax Credit of 10 percent of the purchase price of the home up to $8,000. The CALIFORNIA ASSOCIATION OF REALTORS® analyzed the difference between renting and buying a home in light of recent market and policy developments. Housing costs and tax implications of buying a home and renting a home were computed as a part of the analysis.
• The household currently rents a 3-bedroom, 2-bathroom apartment at the prevailing rent and purchases rental insurance. The prevailing rent for a 3-bedroom, 2-bathroom apartment was $1,855 per month (Q4 2008, latest available). The household purchases renter’s insurance at a cost of $247 per year or $20 per month.• The household considers the purchase of a home at the entry- level price, which is 85 percent of the statewide median price. The monthly cost of housing is equal to the mortgage payment, taxes, and insurance.• The entry-level home is priced at $248,000, or 85 percent of the prevailing median-priced home of $291,800.• The monthly payment including taxes and insurance (PITI) was calculated using a 10 percent down payment, a 40 percent qualifying ratio, the prevailing one-year ARM mortgage rate, and a 1.038 percent assumed insurance costs and property taxes. The monthly PITI payment under these assumptions is $1,630.
Tax Benefits of Owning Versus Renting
Existing tax laws allow homeowners to itemize and deduct the mortgage interest and property taxes from their taxable income. In addition, for First-Time Buyers purchasing a home between Jan. 1 and Nov. 30, 2009, the Homebuyer Tax Credit substantially elevates the tax benefit of buying a home this year. For example, consider two households earning the same income—$48,900 a year—which is also the minimum income needed to purchase the statewide entry-level home price of $248,000. The household that purchases a home (First-Time Buyers) at this price along with the prevailing market factors will give that household a tax deduction of over $15,800 in the first year of ownership as well as the one-time tax credit of $8,000 at that home price. The other household that continues to rent (Renters) will most likely only be eligible for the IRS Standard deduction of $10,900, less than that of their home buying counterparts without even factoring in the $8,000 tax credit. In the first year, the taxable income for the First-Time Buyers is roughly $5,000 lower than that for the Renters, and the difference in the tax liability totals over $8,700 in favor of the First-Time Buyers, mainly due to the Homebuyer Tax Credit in 2009.