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 CALCULATIONS |
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Procedure
Step 1. On a worksheet, write down the amount charged for
renting the prospective apartment.
Step 2. Now enter the
full maintenance charge for the prospective purchased apartment. Make sure
you take the monthly amount and multiply it by 12 to come up with the
annual sum. Then, put the percent associated with the tax deductible
portion (consisting of the real estate tax and building mortgage interest
as a percent of the gross maintenance payment) in a second column.
Finally, multiply the yearly maintenance charge (gross amount) by the tax
deductible percent to compute the Yearly Tax Deductible Amount.
Step 3. Multiply the proposed purchase price of the
apartment by 75% (.75). This is the assumed amount to be financed. On the
Debt Service Payment List (next page), select the interest rate factor
that you think would be applicable to your loan and identify the yearly
payment per $1,000 of loan. This yearly payment consists of the interest
charge on the funds borrowed as well as the principal repayment based on a
30-year amortization schedule. Multiply the yearly payment per $1,000 of
loan by the mortgage amount you calculated above (75% of the purchase
price). This figure is your yearly loan payment, or Debt Payment. To
determine the tax deductible interest amount, multiply the financed amount
by the pure interest rate (the interest rate excluding any principal
amortization). The product of this calculation is the Tax Deductible
Amount. For example, if you borrow $300,000 at 10%, your annual tax
deductible interest payment would be $30,000.
Step 4. Total
the gross Maintenance and Debt Payment figures. Then total the Tax
Deductible Maintenance and Debt Payment figures.
Step 5.
Add the Federal Tax Rate and the State and Local Tax rates, adjusted for
federal taxes, to determine the Total Tax Rate. Multiply the Total Tax
Deductible Amount by the Total Tax Rate to arrive at your Computed Tax
Effect. The Computed Tax Effect is the cash value of the tax deduction you
received from ownership of the purchased property.
Step 6.
Subtract the Computed Tax Effect, from the Total Gross Payment, to
determine the After-Tax Ownership Cost. Divide this by 12 to determine the
After-Tax Monthly Cost.
Step 7. Compare the Applicable Rent
for the Apartment, with the Monthly Cost, Net of Tax, of Ownership. The
difference between the two figures is the Difference, Rent vs. Ownership:
Monthly Cost. If this figure is a positive number (i.e., the rental number
is higher than the ownership figure), then ownership will cost you less
each month than renting.
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