Tax Quarry

A few days ago, I read an article in the New York Times entitled, “The New American Dream: Renting”.  According to the author, Thomas J. Sugrue, “[i]t's time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition.”  The author’s view point is not much different from many critics of the incentives offered by the government to encourage home ownership.  The housing bust has caused a lot of people to reevaluate the benefits of home ownership.  However, as the rules are currently written there appears to be more of a benefit for some consumers than others when it comes to buying versus renting. 

Homeownership may not be for everyone.  If you are a recent college graduate who is living at home and eager to purchase your first home but do not have a down payment, then you may want to forgo the creative mortgage options that will prematurely facilitate your dream and opt to save enough money for the substantial down payment before moving out.  Maybe you are 55, not yet retired, but don’t expect to see much change in your income over the next few years.  You have always dreamed of owing your own home.  You have accumulated savings but will need to assume a 35 year mortgage in order to be able to afford the perfect home.  Home ownership may not be the best option for you.  Alternatively, you may be a young professional in your mid-30 and you and your spouse have just decided to start a family.  You have found a beautiful home in a great school district and once you have made the down payment, the carrying cost will be equivalent to what you were paying in rent.  One catch, you have just been informed that your employer is being acquired and your position will be phased out.  Hmmmm!  Does it still make sense to go ahead and make this purchase?

Well, in certain circumstances it may.  If one person’s income, and any additional savings available after the down payment, can cover the mortgage without putting too much undue stress on the family’s lifestyle, it may be worth going ahead with the purchase.  There are a number of benefits.  You will have a place to call your own and benefit from any appreciation in value, if any, because you are buying in what many believe is a temporary down in the market.  If you purchase before the end of November 2009, you might be eligible for the government’s first time homebuyer’s $8000 tax credit.  In addition, you may also be eligible to deduct the interest on your mortgage – something you couldn’t do with your rent – which will further reduce the effective carrying cost of your house.   Losing that second income and buying a new home may not be as stressful as you thought.      

For more information about the first time homebuyer tax credit and the mortgage deductibility rules, visit the IRS website.  If you plan on taking advantage of any of these tax incentives, before you make any decisions, consult a tax professional or contact the IRS to determine eligibility.   Happy house hunting! 

Marsha Henry

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