A reader who goes by the monicker Ole Miss has a habit of coming up with good questions via the comments section. Yesterday's contribution was:the first 1 million of interest is tax deductible in the US.
She's right - which requires that we also admit to having neglected to include the deduction of 15 percent of one's total house payments - both mortgage and interest - that Spanish tax law permits.
Despite being currently a bit tired of this obsessive looking into the details of everything, we'll compare the two.
The American who buys yesterday's 265,000 dollar home pays, in the first year of the mortgage, 5,240 dollars in interest.... STOP RIGHT THERE! US tax return forms give a taxpayer the option of a 5,350 dollar, no-questions-asked and no-proof-required blanket deduction (and not just for homeowners) for items like interest payments, donations to charitable organizations or the costs incurred in having a tasteless tattoo removed from their teenager's buttock. The net benefit to our buyer - unless he or she foregoes income by giving to an NGO dedicated to saving the Dalmatian armadillo (or whatever) - is zero. According to this fairly detailed piece on the mortgage interest deduction, only about half of American homeowners even bother do the extra paperwork.
In the local case, however, 15 percent of the 18,000 euros - 1,350 to be exact - put out every year over the life of the mortgage can be lopped off one's gross income. Assuming for the sake of argument a 30 percent tax bracket, that turns into a savings of 405 euros a year over the life of the mortgage. Including this in yesterday's figures by subtracting the resulting 12,150 euros from the total costs in fact increases the Madrid buyer's return on costs from 244 percent to 261.
Somebody else was wondering how we calculated the final value of the homes in question. That would be 1 percent inflation on the portion of the flat actually paid off. The principal portion of the first payment gets 29 years of inflation. That of the last gets nothing.
Can we go back to sleep now?
We could imagine some Chicago resident, faced yet again this coming January with a truly evil polar wind barrelling unimpeded down the 500 kilometre length of Lake Michigan, thinking that some place on the beach in Malaga province might be a reasonable life option. That person will have to settle for the 244 percent. This tax break ends at the end of December - but only for those who have not bought before that date.
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6 Comments:
property tax is tax deductible as well in the US. Additionally if some of the maintenance fee is for debt or ground rents incurred by the building that too is deductible. Also more than anything else I think this particular example shows that the US RE market does a poor job of factoring in higher than normal maintenance fees. If you troll around that chicago RE site you would see that this buildings fees/ft^2 are pretty high. Conversely Prop tax seems very low, so I suspect there is something weird going on inside those #'s. Additionally for your HOA fee you are getting a parking spot and a gym. I can't speak to Chicago, but in NYC those amenities would cost you $500/month.
Also in doing this analysis you are examining different approaches to tax policy. US tends to prefer property taxes + income tax + lower consumption tax, as opposed to consumption tax + income tax + lower prop tax. You end up paying about the same in the end, but it distorts this particular analysis.
You're dead right. There's an insurmountably huge comparison problem here on all levels. In Madrid, it probably comes with an independently deeded parking spot that you can sell for 30,000 with no restrictions, for example. The other would probably require that it be sold to another resident - if you in fact own it.
In any regard, you can possibly argue that housing is less affordable on an income basis here than there, but the incredibly low carry has two effects. It makes a housing a not completely unreasonable way of forcing yourself to save money over a long term, keeping demand fairly bouyant. And it drastically reduces sellers' incentives to lower their price, except under duress.
The boilerplate price/income comparison just doesn't cut it.
Thanks for the input.
I think I`ll stop trying to sell my second home and buy another one . . .
CHarles - Ole Miss is a man, at least I hope I am. It stands for Ole Mississippi.
Your numbers are right but the higher the value of the property the more you can deduct in the US.
Anyway, your point is noted.
Sorry. Give him my apologies next time you see him.
Anyone for Boston Edison?
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