When have you made a profit from real estate?
I had a really interesting conversation last week from someone who said they were losing money if they sell their home. The big question is, when have you made money from owning real estate?
So, the person had bought a single family home in Northern California roughly 3 years ago. The purchase price was $250,000. According to their realtor the current value of the home is around $325,000.
Now, did they make money, or lose?
The owner said he is losing money. Not because of a refinance. Not because of costs or prepayment penalities etc. He feels he is losing money because he was making mortgage payments for 3 years totally around $72,000. By the way, I am simplifying the math for illustration purposes.
This was a head scratcher for me. We talked about it at length and made little progress. But here is the thing. The owner made around $72,000 in mortgage payments in 3 years. Most of that money is interest, and tax deductible. So over the course of 3 years they had around $60,000 in income tax deductions. In addition there were some safeguards. For instance, part of those payments goes to insurance (assuming it is PITI). Homeowners insurance covers a variety of things, not only the home. So if something else happened or got stolen, it might have been insured.
It is difficult to value the tax deductions over those 3 years. Tax brackets and all come into play and Im not going to get into too much tax stuff.
There is also some principal reduction, meaning the balance owed the bank is less than what was financed.
Also they had a roof over their heads.
The approx gain of $75,000 is tax deductible because it meets the IRS rule for the owner occupied for at least two of the last 5 years.
Now, if the home was a rental and they paid $2000 a month in rent for 3 years, they have nothing.
Folks, call me crazy but Ill take the $75,000 gain, or even $5000 gain in owning, long before I would take $0 in renting!
