Wednesday, June 6, 2018

Tax Girl Challenges Homeownership And You Should Really Listen To Her

This post was originally published on Forbes May 20, 2015

Home, Sweet Rental: Busting The Hype Of Homeownership by Kelly Phillips Erb and J. Christopher Erb serves two functions.  The first is to encourage people to rethink their attitude toward homeownership.  To many of us homeownership is a necessary step in becoming a full-fledged adult and a house that is rented can never be a home.  This book might help you rethink that attitude.

The second part is practical advice for those who have chosen the rental path.  Kelly and Christopher are both lawyers and Christopher's father was a career landlord, so much of the advice is peppered with personal anecdotes.  If you actively engage with the book it is a bit like having a conversation with a couple with a "He said then she said" feel to it.

Full Disclosure

Kelly Erb is, as you probably well know, a Forbes contributor.  We are facebook buds and I go excited when I saw that she was offering a limited number of electronic copies for review.  Nonetheless, I just bought it, because it really isn't that expensive - a bargain actually.  Here's the deal with me plugging a book by somebody I like.  If I didn't think it was any good, I wouldn't write about it at all.  Kelly, who is the tax mind of the family, told me that she had to keep it very non-technical so I'm going to start by supplementing the controversial part of the book.  That is the part that makes the case that "Homeownership isn't all it's cracked up to be".

The Tax Issues

Kelly takes you through an evaluation of the tax benefits of home ownership, which while substantial are not as compelling as you might think.  The big issue is that the deductions for mortgage interest and real estate taxes only reduce your taxable income to the extent that they exceed the standard deduction ($12,600 for a married couple in 2015).  If you live in a high income tax state like New York or California or are very charitable, you may be already over the threshold, but if you don't start out with a lot of itemized deductions, a modest house might not yield enough deductions to put you over $12,600 and even if it does it is only the excess that helps you.
This part of the discussion is really an illustration of Reilly's Sixth Law of Tax Planning - "Don't do the math in your head".  If the benefit of deductions is pushing you toward homeownership, you should rerun your tax returns with your projected interest and real estate tax deductions and see how much the benefit is.  You may be surprised at how small it is, particularly after you divide by 12 (you can do that in you head if you want).  And don't forget about the alternative minimum tax, which Kelly left out of the discussion in the interest of not being overly technical.

There is also some discussion of the exclusion from income of gains on the sale of principal residence.

Some Non-tax Issues Not Mentioned

Given that the authors are both lawyers and have kids that will be college bound before you know it, I was surprised to find no mention of two advantages of home ownership.  One was asset protection, since many, if not all states, have homestead exemption.  The other was how college financial aid programs count home equity in need determination for financial aid.

Also I think the pro/con section of the book would really be stronger if there were a discussion of condominiums.

Primarily, though they are encouraging people to make a mental shift and separate the issues of saving and building net worth from providing a home for your family.  Particularly for people who are not tied to an area, the economic distinction between renting and owning subject to a mortgage, can be pretty thin. In many markets, you can rent a lot more house than you can afford to buy and the security that comes with ownership is offset by a lot of other risks.  Kelly and Christopher really help you look at that.

I would encourage people who find these arguments persuasive to not forget about the need for doing some serious saving.

Some Great Practical Advice

The title, forgivably, overhypes the controversial aspect of the book.  The practical advice for renters is probably the more valuable part.  I think a lot of people might share the implicit view that I used to have that a lease is something that you sign in order to get the keys.  The authors (Remember they are both lawyers) point out that a "lease is a contract, like any other contract".  That means that the terms can be negotiable. And promises that don't find their way into the lease, are not all that binding.

One tip that never crossed my fairly paranoid mind was to make sure that the person taking your deposit actually owns the property you are renting.  You probably can't afford to have two lawyers with you when you talk to a potential landlord about a lease, but having this book in your virtual pocket is something you can afford.

Besides being inexpensive, the book is also an easy pleasant read.  I've got a huge backlog on my Kindle, but this one didn't put me that far behind.  So go ahead and buy it.  I hope to be the first tax blogger to give up the day job, but if Tax Girl beats me to it, I won't complain.
As far as my personal view on the ownership issue goes, I have to say that if you are mobile, home ownership is extremely risky. but if you are confident that you will stay in the same area for a long time, it is probably a prudent move, although my post-marital experience with condominiums has me a little skeptical whether they are all they are cracked up to be.

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