Cool site for state by state tax rebates regarding energy saving efforts: Database for State Incentives for Renewables & Efficiency
For federal credit allowances and guidelines see IRS form 5695 entitled Residential Energy Efficiency Property Credit
http://www.irs.gov/pub/irs-pdf/f5695.pdf
Of course, the gold mine of IRS forms and info can be found at the IRS Forms and Publications page at
http://www.irs.gov/formspubs/index.html
| Last week, after the Senate gave its final and fully supportive approval on the homebuyer tax credit extension, the House of Representatives voted overwhelmingly to pass the legislation, sending the tax credit to President Obama who's final sign-off on Friday made it official. The $8,000 first-time homebuyer tax credit, which was slated to expire Nov. 30, 2009, will be extended for contracts signed before May 1, 2010 that close before July 1, 2010. First-time buyers, who are in the process of closing now, no longer have to worry about qualifying for the $8,000 tax credit if they do end up closing after the Nov. 30 deadline. The new legislation also increases the income limit for couples with income up to $225,000, a nearly $55,000 increase above the current level. Buyers who already own a home are also now eligible for a tax credit and the purchase of a home. The $6,500 maximum credit will be available to existing homeowners who have lived in their current residence for five consecutive years of the prior eight years. The legislation does set forth several provision including, limiting eligibility for existing homeowners to homes worth $800,000 or less, as well as making both credits available only for primary residences, not second homes or investment properties. The legislation will take effect December 1, 2009 and is not retroactive. The original first-time homebuyer tax credit jump-started the housing market, driving home sales to the highest level in more than two yeas. The National Association REALTORS® reported sales jumped 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September and are 9.2 percent higher than the 5.10 million-unit pace in September 2008. Home Buyer Tax Credit Extended and Expanded
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Too many people bought too much house for too many years.
Yes, the financial system almost collapsed because mortgage bankers and brokers told lies about loan terms and loosened standards in dangerous ways, and investment bankers packaged those loans into bonds that were far more toxic than ratings agencies predicted.
But the roots of the mortgage contagion lie with all of us and our desire to own just a bit more house.
So as the one-year anniversary arrives of our near financial collapse, it’s a good time to blow up a long-standing but underexamined maxim of real estate — that you should always stretch financially when buying your first home.
No one is quite sure who came up with this idea, though suspicions rest on real estate agents or kindly parents with the best of intentions who never expected that real estate prices could fall. Whatever its origin, the economists and financial planners I spoke with this week are almost unanimous in their rejection of it.
Here’s how they dismantled the old saw — and a list of seven suggestions they offered up in its place.
START WITH THE BASICS Let’s begin with some other standards, tried and true advice that served banks and borrowers well for years, until they forgot all about them in the race to write more loans and buy bigger houses. Put 20 percent down, so you have less of a chance of owing more than your home is worth if prices fall again. Get a fixed-rate mortgage, so the biggest part of your monthly housing bill remains stable.
If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more.
That said, if you end up with an adjustable-rate loan, banks may not be concerned with whether you’ll be able to afford the maximum possible payment when the interest rate adjusts in five or seven years. But you should be worried about it.
CONSIDER YOUR INCOME The best case for stretching for a first house is that first-time home buyers in their 20s and 30s will probably see their incomes grow more quickly than older people buying their second or third home.
Harvey S. Rosen, a Princeton economics professor, finds in a forthcoming Journal of Finance article that he co-wrote with two Federal Reserve Bank economists, Kristopher Gerardi and Paul S. Willen, that the size of a house that someone buys tends to be a good indicator of what their income will be later. “People can, on average, make reasonably good predictions of their future incomes and act on them in sensible ways by buying bigger houses,” Mr. Rosen said.
Indeed, much of the mess in the mortgage market has been because of people borrowing money with loans that they didn’t understand — or betting that housing prices would continue to rise enough that they would be able to refinance their loans before the payments rose. Income overconfidence may have had something to do with it (and high unemployment worsened the problems), but it’s probably not the primary cause.
BOW TO UNKNOWNS This research is all well and good as long as you continue to work. But if you’re buying your first home before you have children, you may feel quite differently about work once you become a parent. And if you do, you may not want a mortgage boxing you in to going back to the office three months after the baby is born.
Bobbie D. Munroe, a financial planner with Fraser Financial in Atlanta, encourages younger clients in this situation to model out their budget, including any proposed mortgage, three ways — with both spouses working full time, one working part time and one staying at home for a few years. She also suggests imagining or even practicing living on one income, to see if it’s truly realistic.
“What people should do is ultimately their own decision,” she said. “But they should do it with eyes wide open.”
Even people who don’t want to have children need to consider this. Besides the obvious possibility of sustained unemployment, what about the need to escape a dying industry or an early midlife crisis that necessitates career change to stave off depression? Even government employees and medical residents who believe that their incomes are set for life ought to consider this possibility.
MAP OUT EXPENSES It stands to reason that anyone tempted to stretch for a house will be inclined to play down the expense of maintaining it. These costs are anything but ancillary, though.
For many years, Dennis G. Stearns, a financial planner in Greensboro, N.C., has been alarmed enough by clients’ unrealistic expectations that he’s maintained a home cost spreadsheet that he shares with clients shopping for houses. He also updates it periodically with aggregate, real-world data based on their subsequent experiences.
Mr. Stearns estimates that owners of a newer home that do some work for themselves but contract major work out to others will pay 3.6 percent of the original purchase price annually for maintenance and 4.5 percent if it’s an older home. So if you own a $400,000 home, your costs will probably hit the five figures each year — and may rise with inflation. These expenses will be another 20 percent or so higher if you live in a severe weather area. He does note, however, that the tax benefits of home ownership can offset half or more of these costs in some areas of the country.
BUY BEST (OR CHEAPEST) All of these caveats have given rise to some unusual strategies. Michael Kalscheur, a financial planner with Castle Wealth Advisors in Indianapolis, suggests buying the dream house you covet (if you can afford it) or an inexpensive starter house but not anything in the middle.
“If people have their heart set on something, inevitably, if they can’t afford what they really want, they buy the next best thing,” he said. “That’s absolutely the worst thing you can do. Not only do you not get what you want, but it sucks you dry.”
Why? Well, if you buy that entry-level home instead of the silver-medal home, you can save a lot more money each month after making the house payment (as long as you’re disciplined) than you would if you were paying a big mortgage toward that next best house. And all of your other housing costs will be lower, too. Then, several years later, you’re in a much better position to buy what you actually want.
STRETCH THE HOUSE Better yet, keep in mind that you don’t ever have to move from that first home — and incur all of the transaction costs associated with selling and buying and moving again.
J. Michael Collins, an assistant professor in the department of consumer science at University of Wisconsin’s School of Human Ecology in Madison, suggests paying less for a home that you can upgrade periodically when your income is stable and your savings or available credit make it possible.
In other words, stretching out your tenure in a home (and the physical boundaries of the home itself) may make more sense than stretching for each successive mortgage in a series of two or more houses.
THE EIGHT-HOUR RULE One rule about all of these rules is that it’s unlikely that every one will apply to every circumstance. Individuals and their income streams are too varied, and real estate markets are themselves unique.
When all else fails, however, you can always fall back on the eight-hour test. Whatever the size of your mortgage, you have to be able to sleep soundly at night. So if an impending loan has you stretching for the Ambien, it’s a pretty good sign that the loan is a bit of a stretch as well.
Source: NY Times
Report available to the public as a courtesy of http://www.housingeconomics.com/
Purchasing a home is typically the largest purchase and among the most important financial decision a family makes. There are numerous factors that influence the home buying decision, and among the most important are the tax benefits that help offset some of the cost of homeownership1. Previous NAHB research has discussed the federal government’s (flawed) budget measurement and policy justifications for these housing tax law provisions. This article examines how these tax benefits reduce the cost of homeownership for individual homeowners and homebuyers for certain mortgage amounts and income levels.
Using the methods developed in the paper, a household, for example, with $80,000 in annual income who obtains a $200,000 mortgage will save on average $1,765 in the first year of homeownership. By the end of the fifth year of homeownership, the household will save on average $8,607 on taxes, and this amount grows to $19,488 by the end of the average period ownership — twelve years. This stylized homeowner can expect to save $21,650 in capital gains taxation, yielding a total benefit of $41,138 over the expected period of homeownership. Further, the paper provides variants of these calculations if the analysis allows the homeowner’s income to increase with their age and labor market experience. For example, the five-year tax savings for this homeowner increases to $9,723.
The paper also considers how these numbers are increased by the existence of the temporary $8,000 first-time home buyer tax credit. In the case illustrated above, the five-year tax savings estimate increases 82% from $9,723 to $17,723.
Homeownership Tax Benefits
There are three major tax benefits for homeowners: deductibility of mortgage interest, deductibility of real estate taxes, and the capital gain tax exclusion for principal residences.2 Taken together, these benefits significantly reduce the cost of homeownership. Each represents a significant provision of law. According to the Congressional Joint Committee on Taxation, for fiscal year 2008 the tax expenditure (approximately the size of the program in terms of tax savings) of the mortgage interest deduction totals $67.0 billion, the real estate tax deduction equals $24.6 billion, and the capital gain exclusion sums to $16.8 billion.
As seen in these estimates, the largest benefit for most homebuyers is the ability to deduct home mortgage interest. The tax code permits homeowners who itemize their
federal income tax deductions to reduce their taxable income by the annual amount of mortgage interest paid on a first (and second) home, up to $1 million in total home mortgage debt. Further, taxpayers may deduct interest allocable to up to $100,000 of home equity loans.4 For the purpose of the Alternative Minimum Tax [AMT], taxpayers may deduct non-home equity loan interest from AMT taxable income as well.5 Itemizing homeowners may also deduct state and local real estate taxes paid on an owner-occupied home.
Finally, taxpayers may exclude from capital gains taxation the proceeds from the sale of a principal residence. Taxpayers are limited in the amount of gains that may be excluded from tax: $500,000 of gain for married homeowners and $250,000 for single homeowners. Recent changes in tax law reduce these maximum exclusion amounts proportionally for the amount of time the home is actually used as a principal residence. Periods of ownership prior to January 1, 2009 are treated as periods of principal residence use under a grandfathering rule included in the law.
Measuring the Tax Benefits of the Mortgage Interest and Real Estate Tax Deductions
Calculating the net benefits of the major homeownership benefits seems straightforward but can lead to overestimation if not done in the context of other income tax rules. At first glance, the monetary value of the deductions is equal to the sum of the deductions times the marginal tax rate. For example, a homeowner who deducts $10,000 of mortgage interest and real estate tax deductions and who is in the 25% tax bracket would theoretically realize a tax savings of $2,500 on his/her income tax return.
However, this calculation overstates the benefit on average by failing to account for the fact that the taxpayer must itemize in order to receive a net benefit from these deductions. Unless the sum of the taxpayer’s itemized deductions exceeds the standard deduction (the deduction available in lieu of itemization), it is not to the taxpayer’s advantage to itemize.
This itemization decision implies that a certain amount of the summed itemized deductions yields no net benefit to the taxpayer because of the standard deduction. For example, if a taxpayer in the 25% tax bracket has a standard deduction of $5,700 and a set of itemized deductions totaling $6,000, the net value of the deductions is not equal to $1,500 (25% times $6,000). Even with no itemized deductions available, the standard deduction is available to reduce tax payment by $1,425 (25% times $5,700). So the true, incremental value of the itemized deductions in this example is equal to the difference between $1,500 and $1,425 or $75. Of course, the marginal value — the value of the next dollar of deductions — is equal to 25 cents, but it is the average net value that is important in determining the realized value of the homeownership tax benefits.
Calculating an Example
We can now estimate the true tax benefits of homeownership for examples of various taxpayers. Consider a homebuyer with gross income of $60,000 who purchases a principal residence in tax year 2009 with a mortgage of $180,000. Assuming a mortgage interest rate of 5.86%, the first year mortgage interest payment is approximately equal to $10,580.7 Conservatively, assume that the buyer uses a downpayment of 20%, so the purchase price of the home is $225,000. Further assume that property taxes are equal to 1.2% of the market price.8 Thus, this taxpayer also pays $2,700 in potentially deductible state and local real estate taxes in the first year of ownership.
Assuming the taxpayer is married and files a joint return, the household could claim a standard deduction of $11,400 in 2009. Clearly, with $13,280 in itemized deductions from mortgage interest and real estate taxes alone, the taxpayer will not claim the standard deduction, thus itemizing their deductions on Schedule A of their 1040 income tax return. However, to calculate the net benefit of the housing tax deductions, we need an estimate of all the other itemized deductions in order calculate the incremental value.
Using Internal Revenue Service Statistics of Income data for 2006, we estimate the average sum of all non-housing itemized deductions by income class. For this stylized taxpayer, the estimated total is equal to $6,936 in charitable, state and local income or sales taxes, personal property taxes, and all other itemized deductions. With this information, we can calculate the taxpayer’s taxable income (gross income minus itemized deductions) and marginal income tax rate of 15%.
Now we can estimate the net value of the housing benefits. The net value is equal to the sum of itemized deductions ($13,280) minus the difference of the standard deduction ($11,400) and sum of the non-housing itemized deductions ($6,936) times the marginal tax rate of 15%. This calculation yields a net benefit for the first year of homeownership equal to $1,322.
Using this approach and adjusting the declining annual mortgage interest payment consistent with a self-amortizing loan, we can calculate average tax savings for certain income classes and mortgage amounts.9 Table 1 provides these amounts for the first year of homeownership.
(Table 1)
The example calculated above is found in the row for $180,000 in mortgage and $60,000 in borrower income. As can be seen in this table, the benefits of the tax provisions increase in terms of borrower income and mortgage amount. Nonetheless, as demonstrated in a previous article most of these benefits are claimed by middle-income homeowners ($40,000 to $200,000 AGI).
Summing over the first five years of homeownership, and adjusting for the declining mortgage interest payment over time, yields the following estimates, shown in Table 2. (Table 2)
Previous NAHB research indicates that twelve years is a reasonable estimate for the average duration of homeownership of a single dwelling. Correspondingly, the twelve-year estimates using the method in this paper are shown in Table 3. (Table 3)
Graphing three examples of these results yields the following year-by-year estimates of the tax savings of homeownership attributable to the mortgage interest and real estate tax deductions, as seen in Figure 1. (Figure 1)
Principle Residence Gain Exclusion
The final major housing tax incentive is the exclusion of capital gains for the sale of a principal residence. To calculate the benefit of this tax provision, we must forecast the average price appreciation over the average duration of homeownership. We use the average housing price appreciation rate over the prior 20 years, which includes the historic price declines of 2007 and 2008 as well as the period of unprecedented price appreciation that preceded it. This average is 4.23% according to the Case-Shiller National U.S. Home Price Index. We use a conservative estimate of the capital gains tax rate (15% under present law, despite the likelihood that it will increase to 20% in 2011) to calculate the tax benefit of the exclusion. With these parameters and assuming that the home is sold at the end of twelve years of homeownership, we can calculate the tax benefits realized by the capital gain exclusion, which are reported in Table 4. (Table 4)
Summing the benefits of the mortgage interest and real estate tax deductions with the capital gain exclusion yields the twelve-year benefit estimates shown in Table 5, which in most cases represent significant tax savings for the homeowner. (Table 5)
Lifetime Income Growth
One limitation of this approach for calculating the value of homeownership tax savings is that it assumes the homebuyer has a fixed income for the period in which they own the home. Clearly, this is not a reasonable assumption. This is important because while a homebuyer may have a relatively low income — and thus a relatively low marginal income tax rate — when purchasing a home, his/her income and tax rate is likely to grow as the homeowner ages and gains experience in his/her career. Assume the average annual income increase (at the taxpayer/homeowner level due to aging, as opposed to per capita increases for all workers) is 4%. (Table 6)
Using this approach, re-estimating the five-year table estimated according to initial borrower income yields the larger values reported in Table 6. For example, the tax savings are higher in the $80,000 column in Table 6 than they are in Table 2, reflecting homeowners who enter a higher tax bracket in the fifth year of homeownership. Consider the graph in Figure 2 which reports the tax savings for a borrower with an initial income of $80,000 who obtains a home with a $250,000 mortgage. In year five, the cumulative savings from homeownership begin to diverge because the value of the homeownership tax incentives increases as the homeowner’s income increases, which is presumably correlated with the homeowner’s experience in the labor market. At the time of sale, the difference in this example is more than $11,000 in tax savings — all due to increases in the homeowner’s marginal tax rate. (Figure 2)
Conclusion
This article has presented estimates of the financial benefits of homeownership. These savings total thousands of dollars for the period of ownership and are due to the deductibility of mortgage interest and real estate taxes, as well as the principal residence capital gain exclusion. The estimates in this paper account for the lost standard deduction that results when a taxpayer itemizes and thus reflect the incremental or true value of the housing tax incentives.
An additional tax incentive that became available in 2009 is $8,000 first-time home buyer tax credit. Including the effects of this refundable credit increases the estimates in each of these tables on average by $8,000, which represents a significant increase in the tax savings of the first five years of homeownership. For example, for a homebuyer with an income of $70,000 who obtains a mortgage $200,000 the tax savings increase from $7,718 to $15,718 — an increase of 104%. Or as another example, a homebuyer with $80,000 in income and a $200,000 mortgage can expect his/her five-year tax savings estimate to increase 82% from $9,723 to $17,723.
The combination of the standard tax benefits of homeownership combined with the temporary tax credit makes 2009 an attractive time period to purchase a home.
For more information about this item, please contact: Robert Dietz at 800-368-5242 x8285 (rdietz@nahb.com)
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Footnotes:
1It should be noted that in this article “benefit” does not equate with “subsidy.” There are tax benefits for owners of rental housing as well, including interest and depreciation deductions, as well as the Low-Income Housing Tax Credit. Previous research on the home buying decision can be found here.
2There are other benefits not considered in this article, including the tax exemption for imputed-owner’s rent, the deduction for mortgage insurance, and the tax treatment of reverse mortgage proceeds.
3Joint Committee on Taxation. 2008. Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012. JCS-2-08.
4 It is important to note that not all cash-out mortgage refinancing is classified as a home equity loan, in contrast to acquisition indebtedness that is subject to the larger $1 million cap. Provided the proceeds of a cash-out refinancing are used for home improvement or residential investment, such debt is not home equity debt but the more favorably treated acquisition indebtedness.
5 The calculations in this paper do not include interactions with the AMT. For more information on real estate tax statistics, consult the following article.
6 To the extent that these taxes are in fact fees assessed for a specific, targeted benefit to the home in question, such fees may not be deducted from taxable income.
7 5.86% is the 4th quarter average of 2008 from the Freddie Mac Primary Market Survey.
8 2004 American Housing Survey reported a 1.17% estimated average annual state and local rate residential property taxation.
9 This analysis assumes real estate tax payments and all other itemized deductions increase with the rate of inflation.
