Owning vs Renting -- A thought on taxes and returns

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
User avatar
Topic Author
danielc
Posts: 1079
Joined: Sun Dec 10, 2017 3:48 am
Location: Iowa, USA
Contact:

Owning vs Renting -- A thought on taxes and returns

Post by danielc »

Hello,

So I was reading the Bogleheads wiki page on owning vs renting a home. The wiki claims:
There is a large taxation benefit to owning a home versus renting... is the capital gains exemption. The first $250 K of profit ($500 K if you're married) from your primary home sale is exempt from capital gains taxes. If you make $500 K on your home sale, that is $75,000 (at the 15% long term capital gains rate) that you don't have to pay... If your choice is between purchasing a primary home and investing in a taxable account, and you plan to sell the asset (house or mutual funds) before you die, then the $75 K is a significant benefit.
I don't think I agree. Earlier in the same page it says that "the average annual real (net of inflation) increase in home prices was a mere 0.40%". If that is true, the exemption from capital gains just means the 0.40% real return is fully realized. But that's still a miserable return. A generic balanced mutual fund, even on a taxable account, should easily beat a 0.40% real return. The $75K are not a "significant benefit"; it's just inflation.

Do you agree with me?

Note: I'm not saying that buying a home is a bad idea. I'm just making a very narrow comment about this particular point made in the wiki.
chevca
Posts: 3473
Joined: Wed Jul 26, 2017 11:22 am

Re: Owning vs Renting -- A thought on taxes and returns

Post by chevca »

It's not talking about returns. It's talking about taxes. Not many other places to get $250k or $500k tax free.

Are you saying that investing would probably give better returns? That's probably true. But, you don't get the first $250k/$500k tax free.

Don't overthink it.
bberris
Posts: 2412
Joined: Sun Feb 20, 2011 8:44 am

Re: Owning vs Renting -- A thought on taxes and returns

Post by bberris »

You have to pay taxes on the inflation portion of capital gains in all other investments. While the real return of houses may be small, the inflation-included gain is much larger. You can also leverage housing in a safer mode (no margin call) than with stocks and bonds. That juices your returns.

That small number also does not include the rent you are not paying when you own the house you live in. Put another way, if you rent, you have to pay income tax on the rent money you spend. There is no tax on the rent you don't pay by owning.
runner540
Posts: 1763
Joined: Sun Feb 26, 2017 4:43 pm

Re: Owning vs Renting -- A thought on taxes and returns

Post by runner540 »

The NYT buy vs rent calculator takes this into account already.
User avatar
Topic Author
danielc
Posts: 1079
Joined: Sun Dec 10, 2017 3:48 am
Location: Iowa, USA
Contact:

Re: Owning vs Renting -- A thought on taxes and returns

Post by danielc »

bberris wrote: Sat Dec 16, 2017 7:14 am You have to pay taxes on the inflation portion of capital gains in all other investments.
I know. I thought I implied as much in my post. What I'm saying is that any decent mutual fund, even with full tax drag, could easily beat 0.40% real retrun.

If cap gains on a house were taxed, your post-tax return would be negative. The tax exemption just keeps the 0.40% from going into negative territory. This isn't a "significant benefit" of owning a house; it is "[(removed) --admin LadyGeek] I'm glad we didn't lose money on this thing".
That small number also does not include the rent you are not paying when you own the house you live in.
It doesn't include many things. I explicitly added a caveat that I was not claiming that owning a home is a bad idea. I explicitly said that I was making a narrow comment about this one section of the wiki. There are many other pros and cons to owning vs renting.
User avatar
Topic Author
danielc
Posts: 1079
Joined: Sun Dec 10, 2017 3:48 am
Location: Iowa, USA
Contact:

Re: Owning vs Renting -- A thought on taxes and returns

Post by danielc »

runner540 wrote: Sat Dec 16, 2017 11:51 am The NYT buy vs rent calculator takes this into account already.
Speaking of which, the link seems to be broken.
User avatar
Topic Author
danielc
Posts: 1079
Joined: Sun Dec 10, 2017 3:48 am
Location: Iowa, USA
Contact:

Re: Owning vs Renting -- A thought on taxes and returns

Post by danielc »

chevca wrote: Sat Dec 16, 2017 6:08 am It's not talking about returns. It's talking about taxes. Not many other places to get $250k or $500k tax free.
If the return is just "inflation + 0.4%", the tax exemption is just there there to keep you from losing money. Those $500K are not real. It's just the reduced value of the dollar. Thinking that you are making money is bad thinking.
Thesaints
Posts: 5087
Joined: Tue Jun 20, 2017 12:25 am

Re: Owning vs Renting -- A thought on taxes and returns

Post by Thesaints »

The capital gain advantage only applies to homes used as an investment.
When I purchase the home I like and I don't sell it, I couldn't care less of capital gains.
It reminds me of those who buy cars based on depreciation. I'm not in the business of selling cars, but in the one of enjoying driving them. Therefore depreciation doesn't matter to me.
scotthal
Posts: 189
Joined: Wed Nov 06, 2013 8:20 pm
Location: Portland, Oregon

Re: Owning vs Renting -- A thought on taxes and returns

Post by scotthal »

Thesaints wrote: Sat Dec 16, 2017 2:06 pm The capital gain advantage only applies to homes used as an investment.
When I purchase the home I like and I don't sell it, I couldn't care less of capital gains.
It reminds me of those who buy cars based on depreciation. I'm not in the business of selling cars, but in the one of enjoying driving them. Therefore depreciation doesn't matter to me.
I purchased a home 30 years back. Planning to sell FY18 (downsizing), at a price (constant dollars) roughly equal to what I paid for it. Capital gain, in this case, is simply inflation :: devaluation of the dollar. Would be .. less than pleased .. paying taxes on phantom income.
Growtch, grinch; paranoid contrarian
JBTX
Posts: 11205
Joined: Wed Jul 26, 2017 12:46 pm

Re: Owning vs Renting -- A thought on taxes and returns

Post by JBTX »

The comparison is renting vs owning a house. Not owning a house vs owning stocks. The comparison to equity returns is completely irrelevant in this respect.
chevca
Posts: 3473
Joined: Wed Jul 26, 2017 11:22 am

Re: Owning vs Renting -- A thought on taxes and returns

Post by chevca »

danielc wrote: Sat Dec 16, 2017 2:04 pm
chevca wrote: Sat Dec 16, 2017 6:08 am It's not talking about returns. It's talking about taxes. Not many other places to get $250k or $500k tax free.
If the return is just "inflation + 0.4%", the tax exemption is just there there to keep you from losing money. Those $500K are not real. It's just the reduced value of the dollar. Thinking that you are making money is bad thinking.
I agree with the making money statement. Especially after factoring interest paid, repairs, upkeep, and all. Not often one makes a whole lot on a house. But, how many things in the dollar range of a home can you buy and later sell for a profit tax free? You're simply comparing too many things.

Are you looking at this as, someone has $100k and could put it down on a house or invest it.... who has more after 20 years on that $100k?

Also, there's a timing deal involved. Ask some folks that bought a house on the west coast 5 or so years ago and want to sell now how they made out and if they appreciate the tax exclusion selling a primary home.
Thesaints
Posts: 5087
Joined: Tue Jun 20, 2017 12:25 am

Re: Owning vs Renting -- A thought on taxes and returns

Post by Thesaints »

scotthal wrote: Sat Dec 16, 2017 3:59 pm
Thesaints wrote: Sat Dec 16, 2017 2:06 pm The capital gain advantage only applies to homes used as an investment.
When I purchase the home I like and I don't sell it, I couldn't care less of capital gains.
It reminds me of those who buy cars based on depreciation. I'm not in the business of selling cars, but in the one of enjoying driving them. Therefore depreciation doesn't matter to me.
I purchased a home 30 years back. Planning to sell FY18 (downsizing), at a price (constant dollars) roughly equal to what I paid for it. Capital gain, in this case, is simply inflation :: devaluation of the dollar. Would be .. less than pleased .. paying taxes on phantom income.
Since banknotes do not multiply by themselves to follow inflation, it is actually real income.
User avatar
Topic Author
danielc
Posts: 1079
Joined: Sun Dec 10, 2017 3:48 am
Location: Iowa, USA
Contact:

Re: Owning vs Renting -- A thought on taxes and returns

Post by danielc »

JBTX wrote: Sat Dec 16, 2017 4:05 pm The comparison is renting vs owning a house. Not owning a house vs owning stocks. The comparison to equity returns is completely irrelevant in this respect.
As I said, I am not saying that owning is or is not a good investment.
NYCguy
Posts: 377
Joined: Sun Nov 13, 2016 11:42 am

Re: Owning vs Renting -- A thought on taxes and returns

Post by NYCguy »

OP: I agree with your observation. The key to making money in home ownership or more precisely not losing money in home ownership it’s not at what price did you sell a house for but at what price did you purchase it. I have always found the math behind home ownership to be underwhelming.

There are many good reasons to own a home over renting, but they are not financial.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.
Post Reply