Buying a house and High tax state.. Does it make sense anymore??

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toomuchRE
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Buying a house and High tax state.. Does it make sense anymore??

Post by toomuchRE » Thu May 03, 2018 9:01 am

So after renting for so long, I was trying buy in NY state... The RE taxes are crazy.. The house I'm looking to buy is at 20K/year tax, which is 60% of current rent.. I would say the both houses are of same size and same location.. Wouldn't be a major life style change apart from the fact that, I'm a homeowner instead of renter. ( and the fact that I fear if the price keeps raising, it may one day become too much for me to buy)

Paying RE taxes upto 20K per year and no tax deduction is like adding a 400K mortgage payment for life which keeps increasing... What you guys think ?? just keep my money and keep renting ??

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Smorgasbord
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by Smorgasbord » Thu May 03, 2018 9:21 am

So each year your landlord hands over the first 7 months of rent collected to the state? Ouch. Seems like a lousy deal for your landlord and a great deal for you. I'd keep renting.

Also, your "I fear if the price keeps raising, it may one day become too much for me to buy" comment reminds me of the mid-2000s. :D

onourway
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by onourway » Thu May 03, 2018 9:29 am

Your landlord has to pay the same taxes. You just pay them on his behalf in terms of ever rising rent prices. Tax rates are relatively stable over time. Interest rates are still low. If you buy now, in 20 years your mortgage payment (if you still have one) will look like a bargain compared to then-current rental prices.

Dantes
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by Dantes » Thu May 03, 2018 9:47 am

Average state-wide property tax rate in New York is supposedly 1.65% ( https://smartasset.com/taxes/new-york-p ... calculator ). If it were 1.65% then the 20K would represent a valuation of something like 1.21 million. And if 20K is 60% of your rent then you are paying 40K annually.

What is the tax rate in your area? 20K in taxes makes no sense at all. If you take out a mortgage for a million dollars AND pay 20K a year taxes your annual cost, with no upkeep at all, looks like 76K.

onourway
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by onourway » Thu May 03, 2018 9:50 am

Dantes wrote:
Thu May 03, 2018 9:47 am
Average state-wide property tax rate in New York is supposedly 1.65% ( https://smartasset.com/taxes/new-york-p ... calculator ). If it were 1.65% then the 20K would represent a valuation of something like 1.21 million. And if 20K is 60% of your rent then you are paying 40K annually.

What is the tax rate in your area? 20K in taxes makes no sense at all. If you take out a mortgage for a million dollars AND pay 20K a year taxes your annual cost, with no upkeep at all, looks like 76K.
That's not accurate. Taxes are of course highly local, but I presume he is talking about all taxes - state/county/city/school. In many parts of NY $20k in taxes would be more like a $600-700k home.

adamthesmythe
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by adamthesmythe » Thu May 03, 2018 9:53 am

Smorgasbord wrote:
Thu May 03, 2018 9:21 am
So each year your landlord hands over the first 7 months of rent collected to the state?
In many places assessments and taxes adjust slowly, so it is quite likely a landlord who has owned for a while is paying less in taxes than a new owner.

However that is likely to adjust over time, that is, rents will rise to cover taxes and then some.

Paying high rent OR taxes is the cost of getting (presumably) higher salaries in an HCOL area. You get to decide how you pay that extra cost. MOST of the time, owning is better over the long term- although long term may be more like 10 years than 5. And owning means that eventually you have low and controllable housing costs in retirement.

toomuchRE
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by toomuchRE » Thu May 03, 2018 9:58 am

House I'm planning to buy is around 800K and I currently pay 32k/year rent. Well its not a typical case, because my landlord hasn't increased rent for 10 years...hez got too many properties to worry about this one and cares more about someone with stable income and keep the house neat.. ( Doesn't mean he wont do it next month but this is what is is until now)

quantAndHold
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by quantAndHold » Thu May 03, 2018 10:02 am

I assume that the place you’re considering buying is larger, nicer, and/or better located than the place you’re renting? You’re comparing apples to oranges. What’s the comparison if you compare renting a place that’s similar to the one you want to buy? Or buy one that’s similar to the one you’re renting?

Edit after your last post.... So it sounds like you’re paying below market rent. Personally, I would stick with the below market rent until it isn’t below market anymore.

toomuchRE
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by toomuchRE » Thu May 03, 2018 10:14 am

Yes below market rent.. Otherwise I would have bought a long time ago..

My question was mostly in general.. Does it make sense these days to buy in High tax blue state when you can no longer deduct SALT... Right now it is capped at 10K per year. I pay around that amount in state income tax, so I take full advantage of the deduction.

So now, you can no longer deduct 20K for property tax. So looking at a hit of 5-6 per year compared to pre-tax and post-tax reform. Looks like the impact being felt in those states with high SALT.


https://www.wsj.com/articles/my-clients ... 1525289556
Last edited by toomuchRE on Thu May 03, 2018 10:20 am, edited 1 time in total.

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dodecahedron
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by dodecahedron » Thu May 03, 2018 10:20 am

onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes. You just pay them on his behalf in terms of ever rising rent prices.
Actually, in many places in NY, your landlord has to pay higher property taxes than you would as the owner-occupant. Many localities offer lower property tax rates on owner-occupied homes than rental homes. Also, if your income is less than $500K, owner occupants get a STAR taxbreak from the state which landlords do not get. (Additional property tax breaks for senior owner-occupants.)

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by metrunt » Thu May 03, 2018 10:25 am

You're wondering if it makes sense to buy a house when you will pay a lot in property taxes. I'm not sure why "blue" is relevant here. Or even really 'state'.

It depends on whether you will use the services property taxes provide, primarily child education. I live in an area with low property taxes and the public education system sucks. Many families that can afford it send their kids to private school. My sister lives in an area with high property taxes. She is the type that would send her kids to private school, but the public system is so good, she's happy with the subsidized (by the childless) public education.

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by jadd806 » Thu May 03, 2018 10:29 am

onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes. You just pay them on his behalf in terms of ever rising rent prices. Tax rates are relatively stable over time. Interest rates are still low.
This sounds like the same FOMO, market-pumping schtick spouted by people who watch HGTV all day.

Tax rates are highly local and it all comes down to the dynamic whims of your state and city legislature.

Interest rates are not guaranteed to go up. If they go up significantly, real estate prices will go down.
onourway wrote:
Thu May 03, 2018 9:29 am
If you buy now, in 20 years your mortgage payment (if you still have one) will look like a bargain compared to then-current rental prices.
You ignored the opportunity cost. If he rents and invests the difference (plus invests the down payment as a lump sum), the OP will likely end up with a significantly higher net worth than if he bought a home which will likely appreciate at around the rate of inflation.

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dodecahedron
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by dodecahedron » Thu May 03, 2018 10:39 am

toomuchRE wrote:
Thu May 03, 2018 9:58 am
House I'm planning to buy is around 800K and I currently pay 32k/year rent. Well its not a typical case, because my landlord hasn't increased rent for 10 years...hez got too many properties to worry about this one and cares more about someone with stable income and keep the house neat.. ( Doesn't mean he wont do it next month but this is what is is until now)
Here is a home in upstate NY that sold for $370K in 2016. (I chose it as an example because I have a rough idea of what property taxes run in that neighborhood--it was the first one I looked at, so it is pretty typical for the neighborhood.) Zillow estimate of current market value is $389K. Tax assessment (at roughly 100% of FMV is $378K.) Taxes on it are $16K. Zillow estimates that it would rent for about $30K annually.

So OP's situation is far from unknown. Taxes on homes well under $1M can easily run $20K. There is a lot of variability within various geographic regions around the state. That said, you can find other physically comparable homes nearby that would have lower property taxes but much higher prices.

High property taxes are "capitalized into" the selling price of the home. If the home you have your eye on had lower taxes (all other things being equal) it would have a higher selling price.

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Pajamas
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by Pajamas » Thu May 03, 2018 10:40 am

onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes.
Property taxes over $10k are very common in states like New York, New Jersey, and Connecticut. Someone correct me if I'm wrong, but at the federal level, property taxes over $10k won't be deductible for homeowners but they would still be fully deductible as an expense for landlords and landlords will also benefit from the 20% deduction on taxes on income from pass-through entities. Seems to shift the scales a bit towards renting over owning, at least in theory.

wolf359
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by wolf359 » Thu May 03, 2018 10:40 am

You're not buying a tax deduction. You're buying a home.

Don't let the tax tail wag the dog. A home is a housing expense. Don't think of it as an investment, and definitely don't think of it solely in terms of taxes. The choice is between rent and buy. Taxes should be considered as an impact when making the decision. Maybe the deduction would have sweetened the pot before, and it doesn't now. There are much more important considerations when buying a home. Make your decision based on its affordability, its suitability for your lifestyle and your family's requirements, and where it fits into your financial plan. Don't buy too much house. This tax change simply adjusts the expenses a little on the financial calculation.

The mortgage interest deduction hasn't been there for many people for years. According to IRS records, only 10% of Americans even filed for it in 2016. This is for multiple reasons -- with interest rates still at historic lows, the tax benefit hasn't been high enough to overcome the standard deduction for most people.

Think about it -- the mortgage interest deduction is that you get to write off the interest that you're paying. This reduces your taxes by a fraction of that deduction. That means you're spending hundreds of thousands of dollars to save a few thousand dollars in taxes.

If your mortgage is big enough for the mortgage interest deduction to be worth it, you are probably in a higher tax bracket. (50% of those Americans who filed for the deduction in 2016 had an income over $100,000.) Combined with kids, and you probably also started triggering AMT, which reduced the benefit.

Bottom line is that taxes shouldn't be the primary reason for your housing decision. If you need a home, buy (or rent) that home.

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by ImmigrantSaver » Thu May 03, 2018 10:56 am

toomuchRE wrote:
Thu May 03, 2018 9:58 am
House I'm planning to buy is around 800K and I currently pay 32k/year rent. Well its not a typical case, because my landlord hasn't increased rent for 10 years...hez got too many properties to worry about this one and cares more about someone with stable income and keep the house neat.. ( Doesn't mean he wont do it next month but this is what is is until now)
If you buy the house, I call dibs on your apartment! :wink:

Seriously, I wouldn't give that rent up provided you have enough space!

DVMResident
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by DVMResident » Thu May 03, 2018 10:57 am

To the OP's question, I don't think the tax changes have been fully priced into the market prices, yet. Markets change. Don't worry about the SALT deductions too much. If you're agonist on the lifestyle, just keep running buy vs rent calculators and buy when it makes sense for you.
onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes. You just pay them on his behalf in terms of ever rising rent prices.
This is not true. The landlord RE taxes are deductible on a schedule E.

Landlords who are also renter themselves double dip deductions, getting both to deduct both the standard deduction and itemized deductions (by another name) without the cap. There are many scenarios were neighbors should rent each other's homes (cap exclusion and practical issues notwithstanding). It's a bizarre system.

rob65
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by rob65 » Thu May 03, 2018 11:12 am

Pajamas wrote:
Thu May 03, 2018 10:40 am
onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes.
Property taxes over $10k are very common in states like New York, New Jersey, and Connecticut. Someone correct me if I'm wrong, but at the federal level, property taxes over $10k won't be deductible for homeowners but they would still be fully deductible as an expense for landlords and landlords will also benefit from the 20% deduction on taxes on income from pass-through entities. Seems to shift the scales a bit towards renting over owning, at least in theory.
I haven’t seen it discussed much, but that was also my take on the new tax law.

adamthesmythe
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by adamthesmythe » Thu May 03, 2018 11:25 am

toomuchRE wrote:
Thu May 03, 2018 10:14 am
My question was mostly in general.. Does it make sense these days to buy in High tax blue state when you can no longer deduct SALT...
What you really should be asking is whether it makes sense to LIVE and WORK in a high-tax state.

Consider whether you life will be better living and working elsewhere. (Don't forget about schools, etc. If at some point you might have a family and suddenly discover that high-tax states have better schools, etc.).

As you say you pay a below-market rent now, it is highly likely you will need to deal with the true cost of living eventually.

And as noted- the "blue" thing is a bit of a "red" herring...unless you believe that high-services and strong job markets inevitably correlates with a particular political persuasion.

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by jharkin » Thu May 03, 2018 11:28 am

metrunt wrote:
Thu May 03, 2018 10:25 am
You're wondering if it makes sense to buy a house when you will pay a lot in property taxes. I'm not sure why "blue" is relevant here. Or even really 'state'.
[OT comment removed by admin LadyGeek]

https://taxfoundation.org/how-high-are- ... tate-2016/

It really comes down to a personal decision about where you want to live and running the numbers on renting vs. buying (comparing carrying costs, tax benefits, maintenance cost, investment return you could make on the difference, etc). Even in an overall "expensive" state the best answer can vary neighborhood to neighborhood.

And then there are the non-financial aspects of owner - being responsible for maintenance, and repairs and so forth. And all the quality of life differences between your HCOL area and a LCOL area. These expensive areas tend to be more urban and offer higher paying jobs and access to better healthcare and education. Many of us who choose to live in these areas have found that these benefits more than compensate for the higher cost of living.

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by Afty » Thu May 03, 2018 11:46 am

OP is renting a house at well under market rate. The best strategy for him is probably to continue renting. If he saves/invests the difference between his rent and what his PITI would be if he bought a similar house, he'll be well prepared to buy if his landlord decides to alter the deal down the road.

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Watty
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by Watty » Thu May 03, 2018 12:00 pm

jharkin wrote:
Thu May 03, 2018 11:28 am
metrunt wrote:
Thu May 03, 2018 10:25 am
You're wondering if it makes sense to buy a house when you will pay a lot in property taxes. I'm not sure why "blue" is relevant here. Or even really 'state'.
[OT comment removed by admin LadyGeek]

https://taxfoundation.org/how-high-are- ... tate-2016/

It really comes down to a personal decision about where you want to live and running the numbers on renting vs. buying (comparing carrying costs, tax benefits, maintenance cost, investment return you could make on the difference, etc). Even in an overall "expensive" state the best answer can vary neighborhood to neighborhood.

And then there are the non-financial aspects of owner - being responsible for maintenance, and repairs and so forth. And all the quality of life differences between your HCOL area and a LCOL area. These expensive areas tend to be more urban and offer higher paying jobs and access to better healthcare and education. Many of us who choose to live in these areas have found that these benefits more than compensate for the higher cost of living.
That is an excellent post, anyone who did not read that carefully should read it again.

Family ties make moving difficult for many people but I am surprised that more people do not move to less expensive areas for economic reasons since most people in the HCOL areas don't have the high paying jobs that the area is known for.

You have to carefully consider the non-economic benefits of living in an expensive place to make sure that you are actually using them enough to make them worthwhile.

Years ago I read an article about the high cost of living in New York City and they did an informal non-scientific survey of people that lived there asking why they thought it was worth the cost. The top answers were things like access to plays, museums, cultural events etc.

The follow up question was to ask people how many times they had actually done those things in the last year. Many people had not actually done the thing they just mentioned even once in the last year and few people had done them more than a couple of times. It was very rare that someone actually did those things frequently.

The third follow up question was to ask people why they didn't live some place that was more affordable and just visit NYC once a year to do the things like plays the same number of times. As I recall they mostly only got perplexed looks and people mumbled something like, "It would not be the same."

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by dknightd » Thu May 03, 2018 12:22 pm

adamthesmythe wrote:
Thu May 03, 2018 11:25 am
And as noted- the "blue" thing is a bit of a "red" herring...unless you believe that high-services and strong job markets inevitably correlates with a particular political persuasion.
Interesting observation ;)

toomuchRE
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by toomuchRE » Thu May 03, 2018 12:27 pm

I didn't mean to use the word 'blue' but this world has been used extensively in media when discussing SALT... LOL

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by onourway » Thu May 03, 2018 12:48 pm

dodecahedron wrote:
Thu May 03, 2018 10:20 am
onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes. You just pay them on his behalf in terms of ever rising rent prices.
Actually, in many places in NY, your landlord has to pay higher property taxes than you would as the owner-occupant. Many localities offer lower property tax rates on owner-occupied homes than rental homes. Also, if your income is less than $500K, owner occupants get a STAR taxbreak from the state which landlords do not get. (Additional property tax breaks for senior owner-occupants.)
Certainly not the case in our area. The tax rates landlords pay are based on how 'profitable' their rental is. It's not much of a stretch to imagine how thoroughly that system is gamed. And that's before those taxes are deducted as mentioned elsewhere in this thread.
jadd806 wrote:
Thu May 03, 2018 10:29 am
onourway wrote:
Thu May 03, 2018 9:29 am
Your landlord has to pay the same taxes. You just pay them on his behalf in terms of ever rising rent prices. Tax rates are relatively stable over time. Interest rates are still low.
This sounds like the same FOMO, market-pumping schtick spouted by people who watch HGTV all day.

Tax rates are highly local and it all comes down to the dynamic whims of your state and city legislature.

Interest rates are not guaranteed to go up. If they go up significantly, real estate prices will go down.
onourway wrote:
Thu May 03, 2018 9:29 am
If you buy now, in 20 years your mortgage payment (if you still have one) will look like a bargain compared to then-current rental prices.
You ignored the opportunity cost. If he rents and invests the difference (plus invests the down payment as a lump sum), the OP will likely end up with a significantly higher net worth than if he bought a home which will likely appreciate at around the rate of inflation.
I never said that interest rates are guaranteed to go up. Merely that they are currently low, which makes buying a relatively low-risk play for the long term. As noted elsewhere in this thread, I don't consider my home an investment. It's a home for my family first, an expense second, and if it happens to return anything that's a distant third. I don't count on it. I do know that when my kids are off to college, and our home is fully paid off, I'll be much happier than continuing to shell out for market-rate rent year after year.

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greg24
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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by greg24 » Thu May 03, 2018 12:57 pm

Politics in the subject? In before the lock.

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Re: Buying a house and High tax blue state.. Does it make sense anymore??

Post by Slacker » Thu May 03, 2018 1:10 pm

jharkin wrote:
Thu May 03, 2018 11:28 am
metrunt wrote:
Thu May 03, 2018 10:25 am
You're wondering if it makes sense to buy a house when you will pay a lot in property taxes. I'm not sure why "blue" is relevant here. Or even really 'state'.
[OT comment removed by admin LadyGeek]

https://taxfoundation.org/how-high-are- ... tate-2016/

It really comes down to a personal decision about where you want to live and running the numbers on renting vs. buying (comparing carrying costs, tax benefits, maintenance cost, investment return you could make on the difference, etc). Even in an overall "expensive" state the best answer can vary neighborhood to neighborhood.

And then there are the non-financial aspects of owner - being responsible for maintenance, and repairs and so forth. And all the quality of life differences between your HCOL area and a LCOL area. These expensive areas tend to be more urban and offer higher paying jobs and access to better healthcare and education. Many of us who choose to live in these areas have found that these benefits more than compensate for the higher cost of living.
Completely agree on having to run the numbers.

However:
Maintenance is a two way street that has to be crossed no matter which side you are coming from.

In the OPs case, it doesn't sound like they have any issues.

However, try sitting in Phoenix AZ heat when the landlord waits until the 5th day (last day before you, as the renter, can legally break the lease) to even send someone to LOOK at the A/C. Same problem with water heater. You get tired of constantly sending legal demand letters by certified mail. If I owned the place, I'd have had someone out there immediately in both cases instead of letting myself sit in a house with no hot water for 7 days (luckily in the summer again, so showers were not horrible if taken around 5-6PM).

Now, we are waiting to start our civil claim against the landlord as they finally failed to provide maintenance as required for the last time and we invoked the statutes to break the lease. Their response was of course to keep our security deposit even though the home was returned to them in better condition than we received it. Luckily for us, I'm fastidious about maintaining all paperwork, always getting certified mail, following the statutes to the letter and taking tons of pictures and video.

[(removed) --admin LadyGeek], there was even a time when the landlord stopped paying their mortgage and we thought we'd be kicked out by investors that scoop it up in an auction (AZ provides no legal protections for tenants in foreclosure cases and the federal law expired).

You don't really get to research most landlords on "Yelp" or similar review sites to see if they don't know how to run a business and will try to screw you over as a tenant. They even had a professional property manager who they would constantly tell, "please don't hire anyone, I'll take care of hiring my own people to do the work requested by the tenant".

Having to maintain your own home is not the burden you seem to think it is compared to being a renter and having problems go unfixed for long periods of time (even if you want to fix it yourself and deduct the costs from rent, you still have to wait the minimum 5 days for severe health issues and 10 days for normal maintenance timelines - 5 days and 10 days AFTER they received your letter, not after you first notify the landlord of a problem).

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Re: Buying a house and High tax state.. Does it make sense anymore??

Post by LadyGeek » Thu May 03, 2018 3:53 pm

This thread is now in the Personal Finance (Not Investing) forum (buying a house).

I also changed the thread title to remove "blue" from "blue state". As a reminder, this is a "no politics" forum. See: Politics and Religion
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Please stay focused on the investing / personal finance aspects.
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Re: Buying a house and High tax state.. Does it make sense anymore??

Post by Jags4186 » Thu May 03, 2018 4:05 pm

If you have a below market rent for a place you like then I see no reason to change your situation unless you want and can afford to buy. Owning is as much as a lifestyle decision as it is a monetary decision.

Be wary of buying houses that seem to have low taxes for a neighborhood. Many times a house has low taxes because it has been owned for a long time, has had few if any updates, or if it has updates they were done without permits. When you buy the house you may be in for a rude awakening when the town assessor comes by.

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