|
 |
 DECISIONS |
|
Issue
5: Liquidity
To some people, liquidity is like an insurance
policy against the effects of future uncertainty. Using your available
cash to buy a home may eliminate this protection. If the funds you're
thinking about investing in real estate are essential to maintaining your
lifestyle, you should think twice. On the other hand, purchasing a home is
often the first step toward creating wealth. You build equity both through
your home's appreciation and through yearly tax savings.
You can
also use your home to get cash by means of an equity credit line. This is
a bank line of credit which uses the appreciation you built up in your
home as security for the loan. Funds can be borrowed and paid back at
will, and interest is only charged on the balance outstanding. The rate of
interest on an equity credit line is normally very attractive, and the
interest charge is tax deductible as homeowner interest as long as the
borrowed principal amount does not exceed $100,000. An equity credit line
allows you to tap into the accumulated wealth in your home as and when
funds are needed. Equity credit lines are available from most major banks
or from mortgage brokers at no (or minimal) cost.
Rent or
Buy?
Follow these four steps to do a "Rent vs. Buy" analysis.
The question you will be answering is: On a monthly after-tax basis, is it
cheaper to rent an apartment or to own an apartment? In order to answer
this question, you must:
A. Select a prospective apartment
to buy.
B. Select a prospective apartment to rent.
C. Determine the tax rate applicable to your highest-earned
dollar by combining the federal rate with the New York State and New York
City rates. Make sure to adjust your New York State and City rate by your
federal rate, since state and local taxes are deductible on your federal
tax return. To do this, multiply your state rate by (1.00 minus your
federal rate). For example, if your income is $200,000 and you are married
filing jointly, you are in the 36% federal tax bracket and the 10.6776%
state and local tax bracket. This would compute to an after-tax state and
local rate of 6.833% (This figure was computed by multiplying 10.6776% x
(1.00 -.36) = 6.833%). Thus, you have a combined total rate of 42.833%
(36% federal plus 6.833% state and local taxes after adjustment).
D. Find the maintenance charge on the apartment you have
selected as a prospective purchase and determine the tax-deductible
portion. You should be able to obtain this figure easily by asking the
broker or the seller. In the absence of specific information, brokers
generally use 50% of the maintenance fee as an approximation of the
deductible portion.
|
|
|
.gif){kind=small}
