This week, it's time to take on a couple of otherwise sacrosanct real estate homilies: The tax deduction for mortgage interest and the commission realty firms charge to sell houses. None of the professionals who earn their livelihoods in the housing sector will like reading this, but here goes anyway.
First, the write-off for interest borrowers pay on their mortgages: Uncle Sam allows us to deduct every penny we pay in mortgage interest, up to $1 million a year. Of course, few people pay that much, but it is part of the tax code nevertheless.
According to 2014 estimates by the Congressional Joint Committee on Taxation, the mortgage interest deduction accounted for $72.4 billion in savings for taxpayers. About 34.5 million taxpayers claimed the popular write-off.
But most of that money must have gone to better-heeled taxpayers, because at today's still extremely low loan rates, the write-off is all but useless, at least to folks who purchase modest houses.
This all hinges on how much money you borrow and at what interest rate. The more you borrow and the higher the rate, the more attractive the write-off becomes. But at today's low rates, it may be better to claim the standard $12,600 tax write-off that's available to everyone.
To illustrate, let's look at the average median home price of $288,000 for March, as reported by the Census Bureau. With a typical 5 percent down payment ($14,400), you'd borrow $273,600. And at an interest rate of, say, 4 percent, the monthly payment for principal and interest on a 30-year loan would be $1,306 and change.
In the first year of the loan, you'd pay $10,1856 in interest, so it would be better to claim the standard $12,600 deduction for a couple filing jointly than to itemize.
It's not until the amount borrowed in the above example is somewhere between $317,000 and $318,000 that the better choice is to itemize.
The numbers change as interest rates and borrowed amounts change, but you get the idea. If you expect a big tax break when you are buying your first house, you'd better do the arithmetic ahead of time. Otherwise, you could be in for a shock.
You can find calculators to help with the math all over the internet. I use the calculators at HSH Associates (www.hsh.com), a highly respected mortgage information service based in New Jersey.
Also, it doesn't matter whether you buy a new or an existing house; the calculation is the same. The only thing that may change the equation is your property taxes, which are also deductible.
According to the Joint Committee, 33.6 million taxpayers claimed the property tax deduction, to the tune of $30.2 billion in 2014.
If you want to claim your real estate taxes, you should itemize. Often, the two deductions -- mortgage interest and property taxes -- add up to more than the standard deduction.
And there are many other write-offs -- state income taxes, medical payments, office in the home -- that, all added up, also favor itemizing.
Renters also qualify for the standard deduction, even though they have no mortgage interest or property taxes. But they may have other write-offs that are more than the standard deduction. Most do not, though, which is why renters rarely itemize.
Now, on to real estate commissions: In reality, commissions are always negotiable. But finding a brokerage firm or agent willing to bargain on their fees is all but impossible. There are discount brokerages that charge based on the services they provide, but full-service firms? Forget about it!
At the same time, the brokerage business's main trade group is always trying to get someone else to cut their fees. Just a few weeks ago, Tom Salomone, president of the National Association of Realtors and broker-owner of Real Estate II in Coral Springs, Florida, called on the Federal Housing Administration to reduce the annual insurance premium it charges borrowers who put down less than 20 percent, saying the change will "expand options" for first-time buyers.
But Tobias Peter, a research analyst at the American Enterprise Institute's International Center of Housing Risk, and others at the conservative think tank say cutting the premium would place the mortgage insurance fund at risk of going below its congressional mandate.
Besides, Peter has a better idea, especially since today's market is hamstrung more by a lack of houses for sale than it is of people to buy them.
If NAR would ask its members to slash their slice of the deal by, say, 2 percent, might potential sellers jump at the chance to save $4,000 in commissions on a $200,000 house, or $6,000 on a $300,000 house?
Peter's hypothesis: "Just like any sale brings in new customers, the NAR's sale on commissions would single-handedly boost entry-level supply without driving up prices, as the NAR's calls for credit loosening have done. What is needed is more supply, not more demand."