Case Study & Tax Deductions Explained
Matt & Jen purchased a home for $350,000, with $4,800 in property tax. They put 20% down and have a monthly payment $2,182. Of this monthly payment, $1,800 is interest and real estate taxes, which is tax deductible.
Matt and Jen make a combined income of $100,000. Their employers withhold taxes based on their salary of $100,000. When tax time comes, they are able to claim the mortgage interest and real-estate taxes paid approx $21,600. This effectively reduces their gross income from $100,000 to $78,400. When they compare the taxes withheld on their gross of $100,000 to their adjusted gross – “they overpaid their taxes” by approx $5,400. Matt & Jen receive a refund of $5,400 – just for owning a home!
Use your tax deduction to buy more of a home & let Uncle Sam help you…
Joe & Caitlin could only afford to pay $1,500 per month. However, they could not find a home in this price range. They needed at least $40,000 to $50,000 more to buy what they really wanted. We utilized the tax deduction to help them buy more of a house.
Here is how: Instead of “waiting” until tax time to get their refund, Joe & Caitlin did the following: Since we knew they would easily get a refund of $4,800 – they went to their employer and requested to increase their “dependents” to allow them to take home $400 more per month. Using this $400, we determined that approximately $100 would go towards the additional real estate taxes and $300 for additional mortgage payment. This $300 allowed Joe & Caitlin to increase their purchasing power by $48,700.
Let the Seller help you buy a home.
Cyndi wanted to buy a condo, she had $6,000 total for a down payment and closing costs. Not enough to cover both items.
We found a condo listed for $205,000. Cyndi was approved for an FHA loan with a 3% down payment, using her $6,000, and this covered the 3% of the asking price needed. Now we needed the $5,000 for closing costs and prepaid items. We negotiated the asking price of the condo to $200,000 with the seller to “contribute” $5,000 for the buyers closing costs. In this case, the seller would be effectively netting $195,000 before closing costs.
Cyndi paid $200,000 for the condo, she put $6,000 down making her mortgage amount $194,000. At closing, the seller gave Cyndi a credit for $5,000 which covered the closing costs. Cyndi has her condo, she is happy and the seller is happy. A win, win for all...
Mary was renting a condo for $1,200 per month; she basically was throwing $14,400 out of the window. She wanted to buy a condo she wanted to pay not much more than rent, she thought waiting a year to save more money was the way to go. When we asked the question “how much can you save” her reply was minimal and not enough to make a dent. We structured a deal for Mary where she:
-Prequalified for first time buyer program or FHA program. 5% down
-Purchase a condo for $200,000
-3% down payment = $6,000 plus $5,000 closing costs
-Total monthly payment = approx $1,700 (including mortgage, taxes, maintenance fee)
-Using the tax deduction of $16,800, Mary was able to get a refund of approximately $4,200 per year. Spread this $4,200 over 12 months = $350 per month.
-Mary’s effective monthly payment is $1,350 - so for $150 more per month, Mary now owns her own home.
The Rebalancing Act
Joanne & Ted needed to upgrade their home, their 3-bedroom; 1-bath was just too small for their growing family. They “had” to sell their home for $269,000 and they wanted to buy a 4-bedroom 2.5 baths for approximately $470,000. They became stuck on the number of “Had to get” $269,000. After many months, several other realtors and rejections, we proposed a plan to reduce the price by $40,000. Their house sold and the homes that they liked previously for $470,000, we were now in a position to negotiate. We zeroed in on a home suitable and negotiated a sale for $430,000 which was $40,000 below the asking price of what they thought they had to pay. So by reducing their home we made this up on the “buying" end.
Please consult with your tax advisor regarding your individual tax circumstance.
CONTINUE READING Owning vs. Renting
Contact Joe DeLorenzo Broker/Owner of RE/MAX IN TOWN at firstname.lastname@example.org or call 609-895-0500 x107.