Advertisement
YOU ARE HERE: LAT HomeCollections

REAL ESTATE Q & A

Rent Seems Cheap But in Long Run It Costs More Than Buying a Home

September 17, 1989|ROBERT J. BRUSS

QUESTION: Almost every week you tell people to buy their first home and build some equity in it for a few years so they can sell it and buy a more desirable home. That's hogwash.

Why should I sweat and strain to make the mortgage payments on a home I don't like, so I might someday buy a nicer home that probably won't be much better? I think renting makes much more sense.

For example, in the town where I live I can rent a very nice home for around $1,000 per month. If I buy that same typical home I will need a down payment of at least $25,000 cash and my monthly payment will be around $2,000.

As for not getting the tax deductions, it doesn't make any sense to pay out $2,000 to get a $2,000 tax deduction, which saves me only $560 in federal income taxes. Isn't it time you stop telling your readers to buy a first home?

ANSWER: No. About two-thirds of American households own their home. The other one-third are renters because they can't afford to buy a home, they don't want to buy a home or they want to buy a home but plan to move within a few years, so renting makes more sense.

To show what can happen if you don't buy your own home, let me tell you about some renter friends who have rented the same two-bedroom apartment for over 35 years. They are now in their 70s and are retired on a meager pension and social security. For 35 years they have wasted money paying rent and have nothing to show for it but a pile of worthless rent receipts.

The only reason they can still afford the rent is that their apartment is under rent control and the landlord subsidizes their low rent. However, if the building is sold and the new owner wants to live in their apartment, they could be forced to move out. Unfortunately, they have little savings and no equity cushion as they would have if they instead had bought a home when they were young.

Virtually everyone who buys their first home has to stretch their budget. A home purchase not only creates a place to live but a forced savings account. I recall lying awake the first night in my current home, about 10 years ago, worrying about how I would make the mortgage payments. But somehow I made every payment, and today have built a substantial equity, mostly due to the home's appreciation in market value due to inflation.

Yes, on an out-of-pocket basis renting is cheaper than owning a home. But in the long run, renting is far more expensive than owning a home because renters build no equity and can't look forward to the day when their payments stop.

Few of us spend our lifetimes living in the first home we buy. But the important thing is our first home, no matter how humble, gets us started building equity, so, if we wish, we can move up to a nicer home. That's what the American home ownership dream is all about.

Exemption Can't Be Used on Two Homes

Q: We plan to sell our home, which has greatly appreciated in market value since we bought it 12 years ago. However, we plan to move to Florida where homes are much less expensive. If we also buy a vacation home, probably in northern Michigan, and the total prices of the two homes exceed our old home's sales price can we avoid paying profit tax?

A: Nice try, but your plan won't work. Since you didn't mention anything about being 55 or older, I assume you are not eligible for the $125,000 "over 55 rule" home sale tax exemption.

The "rollover residence replacement rule" of IRC 1034 says you must defer your home sale profit tax if you buy a replacement principal residence of equal or greater cost within 24 months before or after the sale.

Please notice the rule says "a replacement principal residence." Two residences won't qualify because you can have only one replacement principal residence.

Incidentally, if you buy a less expensive replacement home, your profit will be taxed on the difference in the two prices. To illustrate, suppose you sell your old home for a $300,000 net sales price and buy a Florida mansion for $200,000. The tax result is up to $100,000 of your home sale profit is taxable. Please consult your tax adviser for further details.

Choose Best Agent, Not Just the Franchise

Q: My husband and I are debating which real estate agent should get our listing to sell our home. We have narrowed the choice to two agents. One woman has been "farming" our neighborhood for about five years. She is very successful. But she works for a local, independent brokerage.

The other agent, who admits he is new to the business with about six months sales experience, works for a franchised realty office that advertises very heavily on TV and in the newspapers.

Both agents have their pros and cons. As you often suggest, we phoned their references of previous sellers and the woman came out with the best recommendations from former clients. However, the new agent's firm has a relocation program that helped a friend buy her home a few months ago. Which agent should get our listing?

Advertisement
Los Angeles Times Articles
|
|
|