Gimme shelter
Owning your own home can be a haven in the tax tempset

OK. So April 15 is still three months and two days away. Procrastinators still have plenty of time to start thinking about filing their income taxes for 2001.

When that dreaded day does loom closer, though, the howls will start as people begin to realize how much they are paying Uncle Sam and the Golden State.

Those howls will be especially loud from people who don't own a home. They are excluded from enjoying one of the best tax deductions ever -- mortgage interest and other costs of home ownership.

Owning a home is so integral to the American dream that Uncle Sam and the state subsidize it to the tune of thousands of dollars a year per household.

"When people are looking for a tax shelter, this is it, both literally and financially," said Jan Zobel, an enrolled agent with offices in San Francisco and Oakland. Enrolled agents are professional tax preparers who are licensed by the Internal Revenue Service.

However, home ownership isn't always the best move financially. "The only way to find out is to run the numbers," Zobel said.

The first numbers to compare are the cost of monthly rent versus monthly mortgage payment. Beyond that, though, would-be home buyers have to look at the tax savings.

They can get an estimate of these savings from their tax preparer, an online calculator or a calculation by their real estate agent or mortgage lender.

Here are some hypothetical numbers that were run through www.quicken.com/taxes/taxslashing/estimator -- TurboTax's online site for calculating personal income taxes.

Some caveats: These numbers are hypothetical and cover only the first 12 months of the mortgage. The interest paid will decline each year, but not by much in the early years of ownership. Amortization tables that show each year's interest and principal are available at www.hsh.com under "calculators."

These numbers do not take into account appreciation and equity, which presumably increase over the years of home ownership.

Finally, they do not cover loans with shorter terms, adjustable-rate loans or purchases with larger or smaller down payments.

Still, they illustrate the possibilities.

Example A (see accompanying chart) is a $400,000 house for which the buyer put down $80,000, or 20 percent. He has a $320,000 mortgage fixed for 30 years at 7.25 percent, giving him a monthly payment of $2,183 (numbers are rounded up or down).

His property tax is $4,400 per year (1.1 percent of the home's value in this case, but the percentage varies by jurisdiction).

To qualify for these costs, he must earn $87,210 per year.

During the first year of ownership, he pays $23,098 in mortgage interest.

If he's single and has no dependents and no other deductions -- and not including the tax-deductible costs he paid to get his mortgage -- his combined federal and state income tax bill in the first year of ownership will be $15, 302, based on 2001 tax rates.

If he were a renter, his tax bite would be $24,077 -- a difference of $8, 775.

Put another way, the home owner pays 17.5 percent of his gross income for income taxes, and the renter pays 27.6 percent.

A married couple filing jointly -- again with no other deductions but with the same income and mortgage -- would owe $10,203, or 11.7 percent of their joint income, as home owners.

As renters, they would owe $17,310, or 19.8 percent. That's a difference of $7,107.

Example B is a $300,000 home with a $240,000 mortgage (after a 20 percent down payment) on the same terms.

The monthly payment is $1,617, and property taxes are $3,300 per year. The income needed to qualify for these costs is $64,731 per year.

Mortgage interest in the first year totals $17,023.

The single home owner's combined tax bill would be $9,729, or 15 percent of his income. The single renter would owe $15,562, or 24 percent, a difference of $5,833.

A married couple filing jointly would pay $6,147, or 9.5 percent, as home owners versus $9,381, or 15 percent, as renters. The home owners save $3,234.

Because of mortgage interest and property taxes, Zobel said, most home owners have enough deductions to itemize other expenses, such as charitable contributions, state income taxes, job search expenses, professional education and other unreimbursed job-related costs such as use of their car for business.

Most renters may only take the standard deduction, which in 2001 is $4,550 for a single taxpayer and $7,600 for a married couple, filing jointly, Zobel said.

"Usually people don't have more (deductions) than that unless they own a home," she said.

Because home owners will have a lower income tax bill, they can decrease the amount of tax withheld from their paycheck, thus increasing their take- home pay.

Zobel advises dividing the estimated tax savings by the number of paychecks each year, then having that much less withheld. Someone who will save $3,000 and who is paid monthly can increase his take-home pay by $250 per month.

A company's payroll or human relations department can help with the calculations, she said.

In that regard, "one of the cautions I always have for people is not to assume that if they buy a house, they can claim 10 deductions" on their tax withholding, Zobel said. "Do not go overboard."

Other factors to consider for withholding are whether the taxpayers have dependents and whether they want a refund at tax time.

Because taxes and finances are unique to each person or family, it's wise to consult with a tax professional or financial adviser before taking a step as major as buying a house.

It doesn't always make financial sense to buy, Zobel said, citing the example of a client who has lived in a rent-controlled apartment for 25 years. Her rent is so low, he says, that "there's no reason for her to buy a personal residence. Financially, it doesn't make sense for her."

Most tax preparers are willing to consult with people who want an expert look at their situation -- except in March and April, their busiest months. A consultation takes about an hour, Zobel said.

E-mail Judy Richter at jrichter@sfchronicle.com.

CHART (1):
 
  BUYING VS. RENTING
   In many cases, the amount of money a renter spends on rent can be about the 
same as or less than the amount a homeowner spends on a mortgage. With the tax 
benefit for homeowners, the savings can be significant. 
   The chart below shows a cost comparison for a renter and a homeowner over a 
seven-year period. The renter starts out paying $800 per month with annual 
increases of 5 percent. The homeowner buys a home for $110,000 and pays a 
monthly mortgage of $1,000. After six years, the homeowner's payment is lower 
than the renter's monthly payment. With the tax savings of homeownership, the 
homeowner's payment is less than the rental payment after three years.
.
        Rent    Mortgage   Monthly  After tax   Yearly    After tax
Years  payment	payment  difference  savings  difference   savings
   1     800     1000      -200       -50      -2,400       -600
   2     840     1000      -160       -10      -1,920       -120
   3     882     1000      -118       +32      -1,416       +384
   4     926     1000       -74       +76        -888       +912
   5     972     1000       -28      +122        -336     +1,464
   6   1,021     1000       +21      +171        +252     +2,052
   7   1,072     1000       +72      +222        +864     +2,664
   Source: Ginnie Mae


CHART (2):
   HOW MUCH DO I SAVE?
   The homeowners in the following examples each paid 20 percent down, got a 
30-year fixed mortgage at 7.25% and paid property taxes based on 1.1% of the 
purchase price. Income taxes are combined federal and state and do not include 
points paid for the mortgage and any other deductions, including dependents. 
The income figures are based on the income needed to qualify for the mortgage.
.
  .
   Example A: $400,000 house, $320,000 mortgage, $2,308 monthly mortgage 
payment, $4,400 yearly property taxes, $87,210 annual gross income.
                     Taxes
  -- Single
   Homeowner       $15,302
   Renter          $24,077
   Difference       $8,775
 
.   
 -- Married, filing jointly
   Homeowner       $10,303
   Renter          $17,310
   Difference       $7,107
.
   Example B: $300,000 house, $240,000 mortgage, $1,617 monthly mortgage 
payment, $3,300 yearly property taxes, $64,731 annual gross income.
                     Taxes
  -- Single
   Homeowner       $9,729
   Renter         $15,562
   Difference      $5,833
.   
 -- Married, filing jointly
   Homeowner       $6,147
   Renter          $9,381
   Difference      $3,234
.
   Source: www.quicken.com/taxes/www.hsh.com
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