Housing Cheaper for Homeowners

QUESTION: My friends who own homes all tell me that they spend less money on housing than they did as renters. I have a hard time believing that. Are they right?--H. A. H.

ANSWER: The answer depends on the relative values of the houses and such factors as mortgage interest rates, down payment requirements and repair bills, of course. But a consulting firm that specializes in living-cost matters concludes that your friends are basically correct.

Data compiled by the firm, Runzheimer International, shows that a family of four with a $42,000 annual income pays on average $29,201 a year to live in a four-bedroom, 2 1/2-bathroom, 2,200-square-foot house in Los Angeles if it owns the home and $29,951 if the house is rented. Thus, the owner saves $750 a year.

The swing factor, Runzheimer found, is the homeowner’s tax savings. The tax laws permit homeowners to deduct mortgage interest payments from their tax bill but do not entitle renters to write off their rent.


Excluding tax writeoffs from the equation, the Los Angeles homeowner in the example above pays $23,843 a year in mortgage payments, utilities, maintenance fees, real estate taxes and homeowner’s insurance, Runzheimer estimates. Someone renting that same house in Los Angeles would pay $4,815 less, or $19,028 a year, for rent, utilities and renters’ insurance, according to the firm.

But at the end of the year, the homeowner can deduct the interest on his mortgage payment from his tax bill.

As a result, Runzheimer found, the average homeowner making $42,000 a year in Los Angeles winds up paying federal, state and local taxes of $5,358 a year, compared to the $10,923 paid by the average renter with the same annual income. Thus, the homeowner saves $5,565 in taxes, more than compensating for the extra money that he spends on housing throughout the year.

Runzheimer culled its data from actual tax returns. For comparison, the consulting firm also studied housing costs in seven other cities: San Francisco, Boston, Houston, Atlanta, Chicago, Philadelphia and Wilmington, Del. In each case, the result was the same: Homeowners pay less than renters.


In San Francisco, the homeowner’s cost advantage was $699 a year. In Boston, the difference was only $564. Houston homeowners pay $1,001 less; Atlanta homeowners, $2,422; Chicago homeowners, $3,186; Philadelphia homeowners, $3,838, and Wilmington homeowners, $4,936. (The disparity results from a combination of a tighter rental market and depressed property values in Atlanta, Chicago, Philadelphia and Wilmington.)

Keep in mind, however, that the equation could change--although perhaps only slightly--if the tax reform bill approved by congressional conferees last month becomes law later this year.

Mortgage interest payments will continue to be deductible. But individual tax rates will fall, making the tax value of the deduction less.

As the bill is written, a homeowner earning $42,000 a year would pay about 9.7% less in taxes in 1987 than in 1986 if the bill becomes law and about 9.1% less than 1986 taxes in 1988. So, the value of his deductions would be less.


Q: I need to hire a financial planner, but I have no idea where to start looking. So many of my friends have had bad experiences with people who called themselves financial planners but actually knew less than my friends. What’s your advice?--T. P.

A: Word of mouth is often the best way. But since you’ve already struck out there, consider writing to the Registry of Financial Planners for a free directory of several hundred financial planners. All of those listed have met certain knowledge and experience standards required by the trade association for membership. Those standards are spelled out in the directory’s preface. When writing, ask for the Registry of Financial Planning Practitioners. The address is No. 800, 2 Concourse Parkway, Atlanta, Ga. 30328.

Q: What does the tax reform bill in its present form have to say about taxation of part of Social Security benefits? I have seen no mention of this in any of the published reports on the bill.--R. F. E.

A: The tax reform bill doesn’t tamper with the current law on taxation of Social Security benefits. In other words, regardless of whether the 1986 tax bill becomes law, some recipients of Social Security benefits will be taxed on a portion of their benefits every year.


What portion will be taxed is subject to a complicated formula that can be summarized this way: Half of annual Social Security benefits received can be taxed if the recipient’s modified adjusted gross income exceeds $25,000. For married recipients filing joint tax returns, the income ceiling is $32,000 instead of $25,000.

What constitutes “modified adjusted gross income” is spelled out in the IRS instructions for reporting Social Security income.