patrick.net

All things being equal, the mortgage deduction would certainly be a factor in the rent/buy calculation.

But, as has been eloquently pointed out many times on this and other fora, all things are currently NOT equal.

I think the mortgage deduction for OO's in the US plays the same part as the building depreciation allowance for RE investors in Australia. It is a selling point for the Realtor (tm) to trot out.

For any newcomers, you can use this spreadsheet model I created with the help of lots of smart folks from this blog. It'll show you exactly what the tax-deduction is worth to you financially.

Bottom line is the tax deduction is powerful, and good, but it doesn't overcome dramatically overpriced houses.

Investors in Oz get numerous tax breaks, and nothing much on owner-occupying, so the position is more or less reversed from the US one. However, we are seeing similar rates of investment purchasing, e.g. 40% of new mortgages have been for an investment property in both countries in recent times (altho that could be changing as the bubble bursts and ROI diminishes, which even the dummies who just attended a RE seminar can now see).

There's no Prop 13 in other bubble centres, both nationally and internationally, e.g. NYC and DC.

This might mean that other factors are equally to blame -- historically low interest rates, a shaky sharemarket post-Enron, WorldCom and dotcom, and much more liberal lending products from the banks, with a transformed 'acceptable risk' profile. (We are now beginning to see the fallout from the new acceptable risk products from the banks...)

Sharemarkets are recovering and confidence in stocks is increasing. Property ROI is mined out for another 10 years. The Juglar business cycle is turning another notch...

The psychological perception of tax benefit is just too powerful.

These two statements are the same. But they will be perceived very differently:

1. Not paying mortgage interest and not having to deduct tax.
1. Not paying mortgage interest and missing out on deducting tax.

House prices are higher in blue states than in red states.
So, the power of the mortgage deduction is higher in the blue states.
In a sense, where the mortgage deduction mitigates a blue stater's housing cost, it is a kind of a subsidy from the red state folks.

A cap on the mortgage deduction would be more fair to the red state people. But since the Republicans who pander to people in the red states are wealthy elites, they wouldn't dare stoke a fire of resentment in their home turf. So we in the blue states benefit in a trickle down effect.

hmm, well, it's certainly an interesting picture... "Run away! Run away!"

regarding the 250K (500K for a couple) discount, "how do you know if it's your primary residence"? Easy, it's the one you're selling.

I don’t understand why so many people treat the tax deduction like it’s the best thing since sliced bread. After all, you can only deduct money that you spend. That’s money you don’t have for other things like an emergency fund, your kid’s braces, etc.

Well, it does cancel out the property tax that so many of us always bring up...

Oz OOs get a bigger tax break than the US when they sell, the gains from primary residence is NOT taxed at all. Of course, you get no deductions if you sell at a loss. How to determine primary residence? Any homes that you lived in for the last 6 years and rented out for less than 6 months (ajh and DS, correct me if I'm wrong). If you rent out for more than 2 years in the last 6 years, cap gains are calculated pro rata. So theoretically, I can move into one home every 6 years in Oz and reap all the gains tax free.

In the US, if you live for 2 years out of the last 5, you can claim that home as one of your main residences (up to two), and get that $250K pp, $500K per couple tax deduction. So theoretically, you can move every 2 years and pocket your gains $500K tax free.

Oz encourages property speculation far more than the US. Prop 13 is unusual and confined to California, Oz land tax is a joke. You know how much it is for a million-AUD property in QLD, for example? Around $2500 AUD a year, that's it. I don't know how they assess it, but the tax % of the property is so low that the hike in value won't lead to a big jump in annual holding cost of property tax. Then, the council rate is about $1200-1500, so the total holding cost is south of $5K even for high end properties.

Therefore, although Australia taxes heavily on income, and investment gains, holding property in Oz for long-term gains is very cheap. Those in the highest bracket of 48.5% typically buy negative gearing (slightly negative cash flow) properties to lower their income tax while waiting for appreciation.

This whole negative gearing thingy has just as much of a psychological impact as the mortgage interest deduction. You really have to run the numbers to understand if it works for your scenario. With the exception of those who have most of their income locked in the 48.5% tax bracket and confident of property appreciation, the tax benefit is offset by the negative cashflow one has to sustain throughout the lifetime of the property. If your cashflow is positive, then no negative gearing tax benefit can be reaped.

AMT is a complicated bitch. You CAN deduct mortgage interest but NOT property tax. Property tax for a typical million-dollar home in CA is $10K, while the annual interest on a typical loan for that million-dollar home is around $50K, so you see AMT doesn't dilute the tax benefits so much.

If you folks want to see something curious, check out this realtor's site:

http://www.erinna.com/mylisting.php?q=1

I like how some of the properties call out that they were "sold over asking".

The IRS code should have worked the other way around, discouraging property speculation in the US.

Prior to the 97 tax law change, one had to roll all the gains up into a more expensive home within a year of selling his old home, or the gain on his home would be taxed as capital gains. The 97 change made it possible for people to bubble sit, such as Herr Randy, because he got to keep all his $500K gain tax free while waiting on the side line. Plus, lots of flippers are flipping their properties within 1 year, so they are not even taking advantage of the 2-year residency that is mandatory for the $500K cap per couple, nor are they taking advantage of the capital gains tax treatment which requires them to hold their property for at least 12 months.

Therefore, I think the IRS codes have less to blame than the historical low rates and the extremely loose lending policy. If everyone had to borrow money the way that I borrowed back in 94, Bay Area property value would have to crash at least 30% if not more.