Help and Tips for Home2Buy

PURCHASE_PRICE
The price of the house.
DOWN
The down payment. Your mortgage will be the PURCHASE_PRICE - DOWN.
INTEREST
You can change the: Note that the yearly (and monthly payments) are computed using the interest rate, the length of the loan, and the price minus the down_payment.
INVESTMENT_COMPARISON
The Investment Comparison table compares the investment value of the property against what you'ld have in the bank if you had put your money into a safe investment (paying the US Savings Bond Rate) instead.

In other words, this compares two asset values (after the selected number of years):

  1. What you would have if you sold the house (after paying of any remaining principal)
  2. What you would have if you had saved your down payment, and all the shortfall payments you made
Note:   Accounting for inflation yearly shortfalls refers to actual shortfalls, after accounting for increased costs and increased rents -- with increases due to inflation.
It does not mean computing a constant dollar value of payments
INFLATION
The Accounting for inflation rows of this table list what (after the selected number of years) your expenses and net-income will be -- assuming that there is a steady rate of inflation.

Inflation is assumed to have the same impact on utilities, association fees, property taxes, and on the rents you charge. That is, all these increase at the inflation percentage rate per year

DEPRECIATION
VALUE_OF_BUILDING
The value of the building refers to what the house costs. That is, it is the property value minus the value of the land.

Typically, this is determined by using appraised values. For example, if the price is $200,000 and

then the value of the building is (40,000/100,000)*200,000= $80,000

Note that the value of the building is subject to depreciation, while that value of the land is not subject to depreciation.

MARGINAL_TAX
The marginal tax rate is the income tax you pay on the last dollar you earn. This should include your federal, state, and local income taxes.
Note:   If you already have large itemized deductions, only a fraction (about 80%) of your second home mortgage and property tax deductions will be permitted. This can be accounted for by reducing your marginal tax rate.
REFUND
The extra tax refund is the additional refund you get from the IRS due to owning this property. It is determined by: Note that if you are making a profit (if your net rental income is greater then your non-rental interest & taxes), the taxes you pay on this profit are shown.
OTHER_FEES
Other yearly fees refers to expenses that occur on a yearly basis, and then are not effected by whether you rent or not.
For example: association fees and home insurance.

Note:   A pro-rated proportion of these fees are counted as rental expenses.

UTILITIES
Enter the average weekly utilities only over the weeks you are renting.
These are treated as expenses that are fully deducted from your rental income.
REALTOR
Enter the average weekly commission you pay a realtor for managing rentals. This should be a fraction of gross rental income (before expenses).
These are treated as expenses that are fully deducted from your rental income.
APPRECIATION
The yearly appreciation rate is the average percent increase in the price of the property.
Note to capture a complex scenario, with ups and downs, you have to choose a single average value.
SHORTFALL
The shortfall is how much extra you have to pay each month (or year) just to keep up with your mortgage and other expenses.
This represents reductions in your current income (unless you have positive profits!).

Note that a negative shortfall is a windfall -- this is how much more money you have each month (or year)!

UNUSABLE
Unusable weeks are weeks that the house can not be used by anyone -- it can not be rented, and you can not live in it. For example, winter weeks in an unheated beach house.

Unusuable weeks effects your rental fraction. IRS rules suggest that the rental fraction is the number_of_days_rented/365. However, tax courts have been interpreting this as number_of_days_rented/number_of_days_used; where number_of_days_used is the sum of rental and personal use days.

For example:

Then the rental fraction would be... Given that the tax court ruling stands for the forseeable future, and since you can always claim to be using the house (even in the "dead of winter") the choice of unusable weeks is a function of whether expanding your yearly expenses due to rental offsets losses in pro-rated non-rental deductions
CASH_VALUE
The Cash Value is how much money you would have if you had invested your down payment, and all the shortfalls, in a savings account that paid the US Savings Bond interest rate.

Basically, this is the opportunity cost of buying a house. You can compare it directly to the net property value.

Note that the cash value and the net property value do not account for capital gains tax or income tax on interest.

NET_PROPERTY
The net property value is the amount of cash you would have if you sold the house (at its appreciated value), and paid the bank the remaining principal.

You can compare this to the cash value (with or without inflation)

Note that the appreciated house price is the sum of net property value and the remaining principal

DOLLARS_NEEDED
The $ needed to buy house is how much cash you would have to come up with, in addition to your cash value, to purchase the house ... given that house has appreciated.

You can compare this to the remaining principal

REPORTABLE_YEARLY
Reportable yearly expenses are: Note that the higher your rental fraction (the more weeks you rent), the greater the pro-rated proportion will be.
REPORTED_RENTAL_INCOME
The reported rental income is your net profit from renting the house. This is what you report to the IRS.

The reported rental income is equal to the maximum of 0 and:

Thus, you can not report a loss!

A note on reporting losses

Home2Buy assumes that you will be using this 2nd house as both a rental and as a vacation house. Under these circumstances, you are not able to apply a loss in the rental market to offset income from other activities (such as from your everyday job).

However, there is a special case where you can apply up to $25,000 worth of loss. In such a case, the loss will reduce your income taxes!

You can do this by treating your rental property as a business. This means several things:

  1. Personal use of the property can not exceed the maximum of 14 days, or 10% of the days you rent it at full market value
  2. Your adjusted gross income (AGI) is less then $150,000 (of $80,000 if filing singly).
If these conditions hold, then you can apply a rental loss to offset other income.

Notes:
  • Personal use means any time you, or your family (and family includes parents, children, siblings, etc.) use the house; or anytime you rent it (say, to a friend or neighbor) at less than fair market value.
  • You get the full $25,000 if you (filing jointly) make less then $100,000 AGI. Between $100,000 and $150,000 of AGI, you can apply a prorated fraction of the up-to-$25,000 loss.
  • The main advantage to treating the 2nd home as a business is to fully capture all yearly expenses, especially depreciation.
    You can also include mortgage interest and property taxes in computing your losses; however, you can also include mortgage interest and property taxes as deductions (when you do not treat the 2nd home as a business). Hence, the ability to expense a full year's depreciation is typically the best reason for treating the 2nd home as a business!