Location. Location. Location.
That famous phase describes the value of real estate. It also describes the distribution of the tax benefits for owning it. Buy a home in an expensive East or West coast city and you will be showered with decades of tax savings. Buy a home in Peoria or Pittsburgh and you’ll get zilch.
I learned this in two steps. First, I visited the website for the National Association of Realtors. The site provides median home sale prices throughout the United States, updated quarterly. Their current list shows year-end prices in 125 urban areas. It also shows a national median home price of $161,600.
Then I used my online Home Ownership Tax Benefits Calculator to estimate what median homebuyers would receive in tax savings in different areas. The result was disturbing.
In the 25 lowest priced areas anyone buying a median priced home would receive virtually no tax benefit. Median home prices for these areas ranged from $110,600 in Fargo North Dakota and Moorehead Minnesota to $81,500 for Beaumont and Port Arthur Texas.
If you bought a home in Fargo you would enjoy total tax savings of $67 over two years. Every year thereafter your tax savings were zero. Buy a median priced home in places like Daytona Beach, Topeka, and El Paso and there were no tax benefits.
Ever.
Taking the exercise a step further, homebuyers who financed their home purchase with a 5/1 adjustable rate mortgages at 4.5 percent (instead of a 30 year fixed rate at 5.5 percent) would receive no tax benefits from home ownership in 50 of the 125 areas.
Increase the down payment to 20 percent and finance with a 5/1 adjustable rate mortgage with a 4.5 percent interest rate and median priced homebuyers in most of the country receive tax benefits that are miniscule and short lived— if they receive any at all. It is very likely that the $110 billion in home ownership tax benefits is a gift from taxpayers in lower cost areas to taxpayers in high cost areas.
Now let’s look at the other end of the price scale. The 25 most expensive areas of the country have median prices that range from a staggering $516,400 in San Francisco to $189,900 in the Minneapolis/St. Paul area. San Diego, the fourth most expensive area of the country (Orange County, CA and Boston rank second and third, respectively) has a median home sale price of $379,300. Assuming a 3 percent down payment, a 5.5 percent interest rate, a 1 percent of market value tax rate, and a 30 percent tax rate, San Diego homebuyers can expect tax benefits of $59,161 over a 23-year period. This is 15.6 percent of the purchase price.
Median homebuyers in Minneapolis and St. Paul, the 25th ranked area, receive $17,134 in tax benefits over 18 years. The tax benefits are worth 9 percent of their original purchase price.
San Diego to Beaumont: The Range of Home Ownership Tax Benefits |
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| These calculations assume a 3 percent down payment, 5.5 percent interest rate, and property tax rates just over 2 percent of market value for all areas except San Diego. There a tax rate of 1 percent of market value is assumed. Note that different property tax rates would have a material effect on the results. Homeowner income tax rates are assumed to be either 15 or 27 percent, depending on the purchase price of the house. | ||||
| Area | Median Price | Est. Tax benefit | Years | % Home Value |
| San Diego | $379,300 | $59,161 | 23 | 15.6% |
| Seattle | $258,300 | $45,407 | 24 | 17.6 |
| Chicago | $223,300 | $29,914 | 21 | 13.4 |
| Minn./St. Paul | $189,900 | $17,134 | 18 | 9.0 |
| Austin | $151,000 | $ 3,227 | 11 | 2.1 |
| Dallas | $134,600 | $ 1,443 | 8 | 1.1 |
| San Antonio | $110,700 | $ 100 | 2 | 0.1 |
| Beaumont | $ 81,500 | $ 0 | 0 | 0 |
| Source: www.realtor.org, www.dallasnews.com | ||||
It is possible, of course, to pay more than the median home price in any area— by definition, 50 percent of homebuyers do. Buy an expensive home in San Antonio and you’ll have the same tax savings as someone who buys an inexpensive home in Orange County. Whatever the variations in individual experience, however, one thing remains. Tax deductions intended to encourage homeownership nationwide are now working to subsidize expensive areas.
Query: Should the residents of Peoria really send their share of $110 billion to subsidize expensive condos in San Francisco?
If you’ve got an answer— or something to say— on this question, send me a note. I’ll report back on what readers say.
I’ve been an enthusiastic homeowner for nearly 40 years. I have always coveted my precious tax deductions. This information makes me wonder if the deductions are doing what they are supposed to do.
Tuesday: Bubble Support 101: A Tale of Two Cities
Related Websites:
Check National Association of Realtors Median Home Prices:
http://www.realtor.org/Research.nsf/Pages/MetroPrice
The Home Ownership Tax Benefits Calculator:
http://www.dallasnews.com/sharedcontent/dallas/business/2003/mortgage_cal.html
Determine Your Tax Rate:
http://taxes.yahoo.com/rates.html
Calculate How Much House You Can Afford:
http://www.homefair.com/homefair/usr/qualcalcform.html
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Photo from The Lazy Artist Gallery on pexels.com
(c) Scott Burns, 2022