OK… we’ve all paid our taxes a few months ago, and most of us probably aren’t thinking about having to pay them until April 2013′. But don’t forget that it is still real estate season, everyone is home now from 4th of July vacations and some of you may have used your tax refund to finance your last vacation. I’m going to spend this blog post discussing the true costs of not only renting, but later, the true costs of paying for anything that is not tax deductible.
Home prices in the bay area are one of the highest in the nation. Rents in the bay area are also some of the highest in the country. Making the decision to buy or to rent can be difficult, but understanding the true costs of renting may help.
If you are paying rent, you need to clearly understand how much money you potentially can be throwing away. For every $1.00 you pay in rent you’re actually paying $1.40. That doesn’t sound right, does it? Let me explain…
Suppose you are paying $1,500 per month in rent. Your rent is not a tax deduction. In order to have a take home (net) amount of $1,500 out of your paycheck you would need to make a (gross) amount of $2,343. Once you earned the $2,343 gross income the government takes about 36% of that amount ($843) leaving you with $1,500 to pay your rent. Look at the comparisons below:
TO PAY A RENT OF: YOU NEED TO MAKE:
So the next time you write a rent check, you’ll understand the amount you’re writing doesn’t quite represent the TRUE cost of renting, considering the tax implications. In addition, rent is paid month in and month out- there is no ending date. Your landlord won’t call you up one day and say “thanks for paying my mortgage for the last 30 years… I’ll let you stay here free now.
HOMEOWNERSHIP IS A DIFFERENT EXPERIENCE:
The majority of the mortgage payment you make is tax deductible, saving you thousands of dollars each year in taxes. A portion of your mortgage payment actually goes toward reducing what you owe on the home- allowing you to own your home free and clear one day.
While you’re paying a tax deductible, debt-reducing payment you’ll be enjoying equity appreciation of your property that many Bay Area Homeowners have seen consistently long term. If you have any questions or comments, you can email me Kevin@realsmartgroup.com or call my cell phone (415)283-7919.
I welcome your comments below!