In all the excitement over the first time home buyer $8000 tax credit, I’d almost forgotten that really, there’s even more money available for first time Minneapolis duplex buyers.
How are you going to get paid $34,000?
This year, of course, the government will pay you up to $8000 to buy your first home; regardless of how much you pay in taxes.
However, there are four other major financial benefits to owning multi-family income property: rental income, principal reduction, tax savings and appreciation.
What does this mean?
Well, for illustrative purposes, let’s say you buy a $200,000 Minneapolis duplex and finance 96.5 percent of it on an FHA loan at 5 percent interest. This means your monthly payment, without taxes and insurance will be $1036.
Of course, you live in one half. And let’s say the other side is rented for $1000.
This won’t result in positive cash flow. After all, you still have to pay for water, trash, repairs, property taxes, insurance and maybe, heat. The revenue from the rental side of the duplex simply provides all-important help with the mortgage payment.
Now the second benefit of duplex ownership is principal reduction. Again, as tenants are helping with the mortgage, they are really buying you a home. Every year, a part of what you owe the bank is paid off and, rather like a savings account, that equity will be there should you ever choose to sell.
In the case of your $200,000 duplex, in your first year of ownership you and your tenant will have paid off $2782 of your loan.
Tax savings is the third benefit. The IRS allows deductions on your income taxes of a percentage of the interest you pay on your mortgage, and, in the case of multi-family property ownership, the depreciation you took on the units you didn’t live in.
Depreciation is simply a pre-established rate at which something gets “used up”. As you are essentially a business owner, the “using up” of the rental unit’s refrigerator, for example, is a cost of doing business. And you get to deduct a part of that on your taxes.
In the case of our $200,000 duplex, if you were in the 35 percent tax bracket, interest and depreciation would mean you would get a credit of $2544 on your income taxes.
The final benefit is to property ownership is, of course, appreciation. Now, a large part of the housing crisis, especially in warm weather locations like Phoenix, Las Vegas and Miami, is the result of people buying property and betting it would go up in value. This approach is always risky, as we now know.
I’m not a psychic. But I can tell you odds are good at some point in the future, today’s purchases will go up considerably in value: just don’t count on it.
Instead, let’s stick to the numbers we know. An $8000 tax credit, plus $2782 in equity and another $2544 off your income taxes. That’s a total of $13,326 for buying a duplex this year.
But here’s the good news. Even after the first year the benefits will continue. You’ll still get the other $5326 for tax and principal reductions for at least another four years (when this number will change due to different rates of depreciation.) Four times $5326 is $21,304. Plus $13,326 is $34,630.
Give me a call.