Friday, January 04, 2008

taxes & interest

In the last post, Larry questioned whether our savings from renting over owning were net of tax. I found it an interesting question, as I've never really thought about it, so I did.

Firstly, the principle of savings is tax free - the money itself is not taxed, but the interest is. The tax on the interest would be relatively little. Putting aside appreciation in my example, we still saved more than we would have paid on the principle of the mortgage. Then there is the thirty odd thousand that we would have paid in interest. We make about $500/month in interest on our capital, so in the last 3 years we have made about $18,000 on that, less maybe $5K in tax (to be honest, I have never paid any attention to what percentage I pay in taxes, but it doesn't seem any where near 25% of gross. I don't really mind paying taxes, as long as they are spent wisely. They seldom are, but I don't have to pay thousands of dollars a day to stay in the hospital, and Canadian universities don't charge 30-40 thousand a year for tuition, etc.). Add that $13K to the $24K in rent/own savings and we are up at least $37K.

OK, I have to address the appreciation. I thought at the time (2003-2004) that prices were due for a haircut (as did many of you). I was wrong. But what if prices had retreated by 10%? There would be no appreciation, and that $400K house would be worth $360K - maybe less because of it's problems. The $18K in principle pay down would mitigate things a bit(?), but... There would also have been about 6K in property taxes over that time, plus PTT, agents' commissions, etc.

Then I thought, wouldn't that $30K in interest paid be a kind of taxation in the truest sense of the word?

Oh well, I have always recognized that you have to spend money to make money, unless of course, you are a money lender. Then you get your money for nothing, and your chicks for free.

I take some solace in the idea of a 50% correction, which would put that house back to about $350K. Our down-payment will be bigger, and our mortgage will be smaller.


Ian said...

'I take some solace in the idea of a 50% correction, which would put that house back to about $350K. Our down-payment will be bigger, and our mortgage will be smaller.'

I don't doubt that it can happen...

good post
-Ian Mariano

Drachen said...

Not only CAN it happen, unless something completely unprecedented in the history of economics is going on here it WILL happen.

50% is conservative, I expect it will be more in the 65% range.

condohype said...

Predictions are a crapshoot so it's anybody's guess but I have a really hard time thinking these prices are sustainable. How can they be? All you need to do is look at the incomes in this city.

solipsist said...

agreed, agreed, and agreed.

patriotz said...

Remember we saw a 45% drop in the 80's, and that was with falling interest rates. The decline was only halted when the US economy recovered due to low interest rates, tax cuts, a shift away from household saving to spending, and low oil prices. And Vancouver got a big influx of well-off HK immigrants. Both in the second half of the 80's.

Not gonna happen this time. The US is in for a prolonged slump in housing and the general economy and it's going to take a long time to get out of it. Plus the local "gotta buy now" crowd has tapped itself out and there's no demand left for the future.

trotter said...

I almost bought one in this building.
I wonder how people could buy big items like houses & luxury armored vehicles in cash w/o any queries from Revenue Canada.

"Global news tonite – meth lab busted on 5th fl at The Park, Albertni, downtown"

cabinman said...

I believe the U.S. enconomy is at the precipice of the next recession or in one now. With multiple credit defaults and a sharply declining real estate sector this recession has the ear mark of a financial collapse. One cannot know for certain these things, however, Canada has never avoided recession when the U.S. entered one. Further, real estate has never not declined in value once the economy was in recession. It is now likely a matter of months before the problems start here in the last hyper heated market in North America.

Anonymous said...

You don't pay any agents commissions (I assume you mean realtor commissions?) on the purchase of a home. The seller pays that.