Why I Told a Client to NOT Buy a Home | USTaxAid

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Why I Told a Client to NOT Buy a Home

Written by Diane Kennedy, CPA on August 10, 2018

I recently talked to a new client who lived in high priced Southern California. They had a good business and were making money. The next big purchase they planned was to buy a primary residence. Nothing fancy, but in the Southern California market that still meant a price tag of $2,000,000 or more.

That’s when I gave them some advice that might seem contrary to conventional wisdom.

How about if they instead continued to rent the house they lived in?

In “Taxmageddon 2018: How to Brace for the Trump Tax Plan”, I talk about this in Strategy #20: Rent the House You Live In.

“Strategy #20: Rent the House You Live in. This strategy might seem a little extreme, especially if you’re firmly ensconced in your current home. In general, though, let’s take a look at what the new tax law changes really mean. We’ve always heard that it’s a smart financial and tax strategy to own your home. It’ll go up in value, you won’t be throwing money away on rent plus the government will let you take a tax deduction for interest on the loan to buy it.

After 2008-2009, a lot of people realized that real estate has no guarantee that it will always go up in value. And now, your deductions will be limited for property tax and mortgage interest. You might just find the limited write-offs don’t mean a thing to you since you will be better off using the higher standard deduction than itemizing your deductions.

So, what if instead of buying your own home, you bought a rental? Expenses associated with the rental are fully deductible. Even if your income means you can’t immediately take a deduction, the loss is just suspended, not lost.

Another idea works if you can find someone who wants to live in a house that is similar to yours. Buy their house and they rent it from you. They buy your house and you rent it from them. You may even have options to repurchase each other’s houses at a later date.

The main point out of all of this is that our view of our personal residence is changing. Owning your own personal home no longer provides the tax advantages that you’re used to planning on.”

In the book, “Taxmageddon 2018: How to Brace For the Trump Tax Plan”, I talk about a successful real estate investor who has multiple properties and yet doesn’t own his own home. The return is better for him to invest In working class properties. He can rent a luxury home for less than it would cost in payments if he bought it, so he puts his money to work for him with investments instead.

What changes are you ready to make for the Trump Tax Plan in 2018?

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