- PURCHASE_PRICE
-
The price of the house.
- DOWN
-
The down payment. Your mortgage will be the PURCHASE_PRICE - DOWN.
- INTEREST
-
You can change the:
- the yearly interest rate on the loan
- the length of the loan (the number of years to pay it off)
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):
- What you would have if you sold the house (after paying of any remaining principal)
- 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 |
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- 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
-
- Depreciation applies only to the building -- not to land
(the program could, but does not bother, with depreciating
appliances etc.)
- The depreciation you can deduct, like other costs, is a pro-rated fraction
of total depreciation. That is, you can only treat depreciation as an expense
only for the time period during which the property is being used as a rental.
- 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
- if the building is appraised at $40,000. and the
- land is appraised at $60,000,
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. |
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- REFUND
-
The extra tax refund is the additional refund you get
from the IRS due to owning this property. It is determined by:
- computing your non-rental mortgage interest & property taxes
(that is, the interest and taxes due to using
the house as a second home).
- subtracting
your net rental income from this non-rental mortgage interest
& property taxes
- multiplying this difference by your marginal tax rate
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. |
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- 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:
- If you rent for 8 weeks
- You (including family and friends) use it for 12 weeks
Then the rental fraction would be...
- using the IRS rule: 8/52= 15%
- using the tax court rule: 8/(8+12)= 40%
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:
- expenses that occur regardless of
whether you rent or not
- expenses that you can declare a pro-rated proportion of as rental expensesf
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:
- Your cash rent, minus
- your rental expenses, minus
- the fraction of yearly expenses (including depreciation) due to the rental of the house
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:
- 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
- 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!
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