Proof That Prime View Properties Haven’t Depreciated At All

someone’s got an axe to grind…and a website with which to do it.

Of course the editor’s giving his point of view — that’s what you do with a blog! I thought his take was subdued. I would have put in the headline “An $850,000 discount — or 30% off October 2008 asking — is what it takes to get a buyer to bite in this market even for a prime view property!” Or “Prices back to early 2004 for prime view properties!”
Anyway, kudos to the seller for doing what it takes to get the deal done. Took them a while to wise up but then made the smart move.

thanks for the data point, but the way you make your point is irritating.
I highly doubt anyone thinks that this property appreciated in a straight (flat) line. Why would you even bother to make your point this way.
Better point: $400,000 down payment invested at 2% (after tax average risk free yield) x 5 years = approx= $440,000 in 2009. So, compared to the average risk free rate, and ignoring all transaction costs, $35,000 cheaper to buy in 2009. Of course, purchasing usually involves closing costs, and hey, maybe the purchase 0% down.
But this bit about maybe ‘if you believe appreciation stopped in 2004’ is tired.
[Editor’s Note: Nice approach, but with respect why we chose ours, the last paragraph got dropped but has since returned.]

Maybe the ’04 purchaser should have bought put in the stock market instead.
Oh wait….

Interestingly, Zillow says it sold on 10/02/09 for $2.2M: http://www.zillow.com/homedetails/charts/15065688_zpid/
The point about falling far behind inflation is a good one.

All things considered, the owners did all right. I imagine their neighbors in 1442 Kearny (the other unit in the building, approximately the same size) aren’t exactly jumping for joy. They bought for $2.45 million in 2005. Don’t worry, though, with a low interest rate on their variable $1.5million first and a variable $337.5k second, I’m sure they’ll be fine. Real estate is as real estate does…

The point about falling far behind inflation is a good one.
Not really since land appreciation can be completely decoupled from inflation in other sectors.
Land has no cost of production so the value of titles to land are driven purely by the purchasing power of interested buyers, similar to, and interrelated with, the value of titles to land acquired via lease (what we commonly call “renting”).
WIthout wage inflation there can be no inflation, more likely DEFLATION in ground rents and capitalized land values as buyers and renters find their capacity to spend money on the housing good under pressure from increased spending in other sectors (such as increased taxes, energy costs, health care / insurance, education, food, etc).
MZM is up 50% from 2004:
http://research.stlouisfed.org/fred2/series/MZM
yet prices are similar. It is a puzzle.

It was bought for 1.995M in 2004, and it sold for 2.2M 10/16/09. Apples to apples the property appreciated 10% in five years. Why this was chosen for a soapbox stance is not known.

Well anonn, according to you, isn’t this property irrelevant because it’s a condo? Don’t think you can have it both ways.
(apparently originally sold 1/9/2001 for $3M and made into 2 units: 1440 Kearny and 1442 Kearny
http://www.redfin.com/CA/San-Francisco/1440-Kearny-St-94133/home/1267325
http://www.redfin.com/CA/San-Francisco/1442-Kearny-St-94133/home/1794059
Wonder how much that 2001 buyer made.)

eddy – I agree, though I suspect our fearless editor goes through these linguistic gymnastics to try maintain the feel of a balanced site, even though us regulars know that it clearly is not balanced (with respect to the editor’s point of view).
I’ve been bearish and remain bearish (though less bearish) on housing. So again, I can understand the view that the editor is just presenting facts – but there is some slight editorial bias. But hey, it is his site, and I’m sure the justification is that the market is moving down, and as a result most apples will show little appreciation, and most will show significant depreciation. I believe this is true.
The WSJ and NYT both have strong editorial content slants. Both of them are excellent mainstream newspapers. It is important, though, to know that slant when reading the content. Same is true here.

Who said anything about relevance? Would you prefer to be left with miscategorized misinformation moving forward, sfrenegade? LOL.
I shared an opinion the other day, one that’s easily backed up by data. SFRs have stood up better, period, point blank. It’s a relatively dense city, for one thing. The reason why this has happened should stand to reason. “Relevance,” “irrelevance” — these are things you’re saying. Condos aren’t doing as well by and large and it’s not arguable. If you want my opinion, then yes, this one went against the grain performance wise.

“Would you prefer to be left with miscategorized misinformation moving forward, sfrenegade? LOL.”
I don’t think I suggested that. It seems like there’s a genuine factual dispute here on whether the sale price was $2.2M or $2.0M, and I’ve stayed neutral with respect to that dispute. You’re the one talking about soapboxes.

sfrenegade, there is a dispute, but after re-reading, it doesn’t seem to be factual. given a choices between “a reported contract price” and propertyshark / MLS, I’ll go with the latter.
2.2 sure would make this graph read differently:
Is this proof positive that prime property values haven’t actually fallen in San Francisco? Only if you believe that prime real estate in San Francisco stopped appreciating in early 2004.

sfrenegade,
you said that i should find this irrelevant because it’s a condo. I never said that. What I said, in a thread talking about a particular SFR, is that I never bought into the concept that condos and SFRs are/were as closely lock step linked as others. Point is, they’re practically two different markets. What, I can only comment on SFRs in your book? You picked a funny moment to spar with me. “Soapbox” is a given. Look at the editorial slant of the presentation.

I guess we can agree to disagree here (although I agree that the condo market and the SFR market are different, because that seems rather “duh” to me). Here was the quote that was reposted on the Twitter guy’s thread in which you said that only SFRs are relevant with respect to pricing the market:
“And again, the MLS is the only database that matters to me, and I have continually shown price remaining static … sometimes a bit higher, sometimes lesser. You guys like to seize on condos. I prefer SFRs as indicator. It’s a bit of a broken record really. Condos are taking a hit. That’s because there are a lot of them.”
Posted by: fluj at April 8, 2008 3:30 PM
https://socketsite.com/archives/2008/04/justquotes_national_pending_home_resale_index_hits_seve.html

dogboy,
What are you talking about? Did you read this thread, or the other one? How am I propping up anything? I pointed out an error, incorrectly presented. If you prefer to be left in the dark then stay there, silently. If not, then let it go man. All your negativity. Ummm. Ummm. Ummm. Let it wash away like a cool stream. There. Isn’t that better?
sfrenegade (a k a fronzi),
Yeah. Thank you for pointing out my consistency.

One point I’d like to make about this property: permitting began in the mid-nineties and they built a condo duplex instead of a SFH, which is what would have happened in the bubblenomics of this century. Ahhh, the sanity of simpler times…

I hope the editor doesn’t mean for the thread to just disappear without a comment and that he wants to fix the error, assuming there was one, and let the discussion continue.

hopefully here is a more innocent explanation and the thread will return (with corrections).
I’d also like to hear more about the source of the $2M “contract” figure and what else this person has tipped than can (or can’t) be confirmed.

It’s being edited to clarify that we are now at late 2004 prices instead of early 2004 prices.

I don’t know why anonn is making such a big stink about a 10% gain. It still didn’t beat inflation, so there’s a real loss there, even if a nominal gain.

“The 1440 property sold for 2.2M not 2. The editor, thinking it went for 2M, had framed it like it was a loss, as if it was an illustration that even great properties are not immune to loss these days”
Anonn is correct. The thread was supposed to show that the house barely broke even or even lost. The fact that it sold for 2.2m (assuming it did and I do think it did) puts a lie to that.
If we’re here to gather good information, then anonn has helped out and should be thanked not dissed.

I’m assuming the other thread on the 2.2 mill or was it 2million property will be back in the AM.
Otherwise, we have a different sort of bias here, and not the kind that can simply be rationalized. I’ve admired this site because it provides excellent information, even if I don’t always agree with how it is presented.
If the property really did close at 2.2 million instead of 2 million then anonn or whoever it was that indicated this fact deserves our thanks.

cameronrex, there would be no need to hijack a thread had socketsite not deleted a post and the associated 20 comments. that is an extremely unusual action in the blogosphere, so it is my hope, as you and polip suggest, that there will be a full explanation in the morning.
[Editor’s Note: Of course if you were really concerned you could have sent a note to the site and likely had an answer within the hour, but where’s the fun in that?]

cameronrex: lots of the commenters here are agents. draw your own conclusions about their amount of time spent on the site.

UPDATE: Sorry folks, but it looks like we originally screwed the proverbial pooch on this one. The “recorded” (think assessor’s office) sales price was in fact $2,200,000. We’re currently trying to confirm if we simply misread the “reported” (think MLS) sales price as $2,000,000 (which is entirely possible).
The original text for those who will undoubtedly be more concerned with screaming “cover up” rather than the actual accuracy of the information:

Purchased for $1,995,000 in April 2004, 1440 Kearny hit the market in October of 2008 seeking $2,850,000. Reduced a number of times to $2,295,000 before being relisted, the sale of 1440 Kearny closed escrow on 10/16 with a reported contract price of $2,000,000.

That’s total appreciation of 0.3% over the past five and one-half years (average annual appreciation of 0.05%) for this rather prime view property. Is this proof positive that prime property values haven’t actually fallen in San Francisco? Only if you believe that prime real estate in San Francisco stopped appreciating in early 2004.

On the other hand, if the value of this property had appreciated at a nominal (especially given the timeframe) 4% a year from purchase through 2008, it only would have had to have declined in value by 17% to reach its value today.

Mistakes happen, and when they do we correct them as quickly as possible. If that means having to temporarily pull a piece until it can be confirmed and corrected rather than keeping inaccurate information published, so be it (especially if it’s once out of every 4000 or so times).

good work as always editor
10% over the 5 years isn’t fantastic, but it is far from terrible.
closing costs etc make a big difference, but cash over cash, assuming a 20% downpayment, that is a leveraged 50% gain in 5 years.
I’ve made the point time and time again that leverage is what makes real estate so dangerous. It is also what makes it so potentially profitable (that and the cap gains exclusion, low rates on the leverage (i.e. low mortgage rates)). It would be hypocritical to note that only the losses are leveraged.
If the sale price was really 2.2 million, kudos to owner. That is far better than I would have expected in this market (even if they could have done a bit better by selling in 2006 or so). Even after closing costs I would assume they came out ahead on this transaction, and with a rather decent after tax yield (not on a risk adjusted basis, but that is another topic entirely).

closing costs etc make a big difference, but cash over cash, assuming a 20% downpayment, that is a leveraged 50% gain in 5 years.
Sorry, but that’s not even close. Any total cash on cash return calculation would not only need to account for transaction costs (likely around $150,000) but also taxes ($25,000 per year) and carrying costs (the other side of leverage) at a minimum. Interest only payments would have been around $8,000 per month ($96,000 per year), we’ll let you argue about the value of imputed rent.
Completely ignoring the cost of carry and assuming 20% down, the cash on cash return on this 5.5 year investment would have been closer to 28% or 4.5% per year.

Even though it sold for 2.2M that’s still $650,000 less than the seller was apparently hoping for when the place hit the market a year ago. That’s got to hurt.

editor – I did say closing costs etc make a big difference – and they do
but then in your analysis you left out potential tax benefits of the mortgage interest deduction (yes only on the first 1.1 million of the mortgage), and of course imputed rent (who knows, certainly not me – it is a very nice and unique property).
I think your analysis is likely closer to the cash on cash return (though I don’t know their down payment). Is it 50%. Nope. But 4.5% after tax return from 2004 to 2009, even if that is what they realized (perhaps as low as 4% or even 3.5% perhaps higher than 4.5%). Assuming they were in a total marginal bracket of around 40% (I’m being generous, it was possibly higher), they would have required a 7.5% pretax yield to achieve this rate of after tax return. Call it 6% after tax if you prefer. As I said before, this is not fantastic, but far from terrible.
And as I said before, on a risk adjusted basis, this most definitely was not even a good return on the original equity.
But as investments from 2004 onward to 2009 go, this was acceptable. And oh, we have forgotten the psychic benefits of living in the house 🙂
If I was the seller of this house I would be thrilled that I got out alive on this one.

With 10% down the cash on cash return for this 5.5 year investment would have been around negative 43%.
negative 43%?
is that with a 2.2 or 2.0 million closing price
oh I’m confused now

“That’s 60K a year, or 300K for the entire period, that would have otherwise been spent on rent.”
Instead, assuming anonn’s $9500 figure, $114K (less $23K in tax benefits as 30% of $77K) a year or $570K (less $115K tax benefits as calculated above) for the entire period was spent on interest and taxes, and $150K (as estimated by the editor) was spent on transaction costs, all for a $200K gain. Woohoo!

“This is what all people who buy real estate do. All of them.”
Actually, none of them do that because the tax deductions phase out if you make over $126K in income per year. A good rule of thumb here is to ignore the deductibility of the property tax. It’s all deductible but the phase out usually hits you about as much as the property tax deduction, so if you ignore its deductability, you get the same result.

The negative 43% return on 10% down, 2M purchase and a 2.2M sale comment by the editor is the purest distillation of what this website is about.
If by that you mean financial acumen rather than industry rhetoric, then you’re right.
At 10% down call it $199,500 of cash invested on a $1,995,000 purchase. Selling for $2,200,000 yields a $200,500 “gain.” But less transaction costs of $150,000 (closing, transfer and selling) and taxes of $22,792 per year (1.14% on average to be more precise) yields a net loss of $74,644. On a $199,500 investment that’s a negative 37% cash on cash return (not including any cost of carry). The negative 43% was using a $25,000 per year in taxes as roughly outlined above.
Again, this is all assuming zero cost of carry which is rather foolish when analyzing a leveraged investment. But instead of arguing over the value of the imputed rent and hypothesizing on interest rates and individual tax implications, we decided to just called it all a wash.
But if you want to be a little more precise, the rate on a super jumbo loan was likely closer to 6% than to 5% in 2004, so let’s call it 5.5% and $98,750 of annual interest. And best case scenario, we’re probably talking about a maximum of around $25,000 in total tax savings annually (which is likely overstated).
Regardless, also call it $60,000 per year in imputed rent ($5,000 per month per anonn) for a best case net cost of carry of $13,750 per year, or an additional expense of $75,460 over those five and one-half years.
Subtracting $75,460 from -$74,644 yields a total loss of $150,104 on a $199,500 investment for a negative 75% cash on cash return.
Once again you’re right, we really shouldn’t have been so cavalier or imprecise (although this does remain relatively back of the envelope).

nice math editor
definitely a better accounting than I did with my lazy ignoring of transaction costs 🙂
I feel better now.
although, you did ignore the possibility of deducting property tax on federal returns (AMT, individual tax situation, etc make it very difficult to determine how much, if any of the property tax would have been deductible). This is a key point, and without knowing this piece of data – we are a bit stuck.
a quick check of the old rnt vs buy calculator with these figures suggests breakeven would have ocurred at almost exactly 5 years – not sure why their accounting would be different than what is presented here – my guess is the calculator overestimates the tax deductibility of mortgage interest and property taxes
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html#
[Editor’s Note: The property tax deduction was included in the maximum $25,000 per year (it wouldn’t be nearly that based on any interest tax deduction alone). And you might want to try that calculator again using “Home Price Appreciation” of 2% (which is what was realized) if you didn’t.]

“I’m not going down this road with the likes of you.”
That’s because your handwaving isn’t a substitute for math. SocketSite’s analysis at 1:22PM is right on, and I’d love for you to point out why it’s wrong.

I’m not going down this road with the likes of you. Every positive rounded down. Every negative rounded up. Gladly taking my generous measly 5K a month and then trying to gouge. Tax deductions not understood. Etc etc. No thanks. 43%, 75% blah blah blah. You’re wrong.
Classic example of cognitive dissonance.

“I’m not going down this road with the likes of you. Every positive rounded down. Every negative rounded up. Gladly taking my generous measly 5K a month and then trying to gouge. Tax deductions not understood. Etc etc. No thanks. 43%, 75% blah blah blah. You’re wrong.”
Come on fluj. Just do it in a spreadsheet and cut and paste it here. Wont take u 5 minutes. Prove it if u can..

Where’s a spreadsheet, Mac?
Yeah, 7500 for rent is probably more accurate. Whatever.
The carry on 1.995M – 199,500 X .055 X 5 = 493K or so.
Subtract the piddly 5K/mo otherwise spent on rent, X 12 X 5 = 300K. Then subtract about 30K per year tax deductions (5X 30 150K.) So that’s 493 – 450 = 43K. It it cost about 43K. There’s the expense.
Because remember, the seller walked away with the entire down payment back. It did not go poof into thin air. Plus the 205K profit – 2.2M X .05 agent -16,500 transfer = 73.5K net. Is that, or is that not more money than 43K?

fluj, you left out property taxes. It’d be nice if an owner didn’t have to pay those, but you do.
And everyone has ignored maintenance costs, paid for by an owner but not a renter.

That’s pretty fuzzy math, anonn:
Failure #1
$1,995,000 * 0.055 * 5 years = $548,625, NOT $493K.
Failure #2
Property tax of $22,743 in the first year wasn’t added to this total — we can simplify to $23K * 5 years or $115K.
So even with your assumption of a 38% tax rate (which I think is high) and a 5.5% interest rate (when it should be higher in 2004, I think, for this size jumbo loan), your own numbers are off by $55K + $115K or $170K.
Thus, you would get:
$548K (interest) + $115K (property tax) – $300K (rent) – $150K (tax avoided) in costs = $213K costs
vs. your $73.5K net in profit.
You’re wrong on the conclusion, and the editor is right.
Even if you assume $7500/month rent (which was not your original belief):
$548K (interest) + $115K (property tax) – $450K (rent) – $150K (tax avoided) = $63K costs.
So that’d be a $10.5K net gain, which sucks.

Be of good cheer anonn. Renting gives a -100% return on investment.
Without inflation, homeownership is a money losing proposition. In a normal market it just doesn’t lose as much as renting does.

FWIW, I already acknowledged that failure #1 is wrong because of 10% (and note that it’s still a loss at 20% and 5K rent).
Property tax? If you want to throw it in to expenses, you can, I guess.
OF COURSE it’s an expense. What would be your rationale for not having it be an expense?
“But you really don’t even know whether or not they can deduct it. There’s a chance that they are not subject to AMT.
But if they are subject to AMT, you could also just as easily say they deducted far more than I allowed for. Do a search for AMT strategies + mortgage interest deductions or similar. You’ll see.”
Sure, but all of that only makes my point stronger and makes your point weaker.
The AMT allows deduction for mortgage interest if that mortgage interest is paid on real actual home improvements. The AMT does not allow property interest deductions. So if that was the case, you are subtracting a smaller number under tax avoidance, so your costs are higher.

“Because, sfrenegade or fronzi, sorry, but you can deduct home purchase debt interest under AMT. Look it up. ”
Yes, I know. That’s where the $150K deduction you calculated comes in. I used your calculation. (that’s $30K that you calculated based on $55K max mortgage interest deduction, i.e. 5.5% of $1M, and $23K on property tax — so $30K tax avoided on $78K in deductions, which means you assumed a 38% tax rate).
If you are subject to the AMT, you can only deduct the $55K on mortgage interest, so take 38% of $55K or roughly $21K tax avoided. So my argument gets stronger by $9K.

Is that what Fronzi told you or what I told you? (again, I’m not Fronzi, despite your suggestions to the contrary) I’m not really sure why you’re harping on this AMT issue as it only makes my point stronger and your point weaker, as I mentioned before.
I’m incredibly familiar with the tax code, and I know that the two chief deductions you’re allowed under the AMT are charitable and mortgage interest.
However, the difference for the AMT vs. non-AMT is that under the AMT, if you use any of the mortgage proceeds for non-home improvement uses (e.g. if you fold your BMW loan or kid’s college tuition into a cash out refi), to the extent you make those non-home improvement uses, the interest isn’t deductible. So if you take an equity loan of $300K, and $150K goes to remodel and $150K goes to your kid’s tuition, only the $150K remodel portion of the equity loan is deductible under the AMT.
Please show me where I said the AMT doesn’t allow home interest deductions.

We had already been over property tax. You posted a specific challenge, using the word “failure,” specific to home interest deductions, and this occurred after that post, which you have edited. I provided you with links to learn the reality of what’s permissible. Obviously you used them, or googled.

That being said, we don’t buy anonn’s other assumptions with respect to tax deductibility or transaction costs (no closing costs?),
Ahhh. The old, “sorry, BUT …”
Transaction costs were included. Give or take a few minor title fees that are sometimes negotiable, realtor fee + transfer tax = closing costs for a seller in San Francisco. The rest of the escrow fees are paid by the buyer here. You should know that, number one. And you shouldn’t be rounding them up to 150K and then jumping down people’s throats either. You provide fuel for the fire, man. There are a lot of people who read this who love to talk and don’t know a thing. They follow your lead.
There were no assumptions about tax deductibility made on my part. I provided links to an IRS site, an MSN site, and a mortgage blog.
[Editor’s Note: Closing costs at the time of purchase (2004), like you said paid by the buyer here. Easy rule of thumb is at least 7% (buy/sell) which we rounded down (not up) from $154,000.
With respect to tax deductibility, there are only assumptions being made about individual tax brackets, AMT, etc. We doubt the effective credit would even amount to the $25,000 per year we used much less your $30,000.
As has been shown time and time again, simply multiplying ones tax rate times interest greatly overstates the effective benefit.]

FWIW, my assumptions on tax deductions were originally 30% of the amount of the deduction. I first calculated it this morning as 30% of $77K ($55K interest + $22K tax) per year, or around $23K. anonn said $30K (38%), and reasonable minds can disagree here based on the tax rate. With the AMT, anonn’s calculation goes to $21K, and mine goes to $16.5K. Nonetheless, these numbers won’t make a negative investment into a positive for this house.
And anonn — all I said was that property tax paid should be a COST included in the above costs. See?

Again, I never said that mortgage interest wasn’t deductible under the AMT. You’re completely fabricating this. I did make a typo which I already pointed out [above].

Where are these supposed links you provided? I’ve never seen them posted on the page. Does *anyone* remember seeing them?
Where are these “repeated” cases of when I said something about the AMT? I wasn’t the first person to bring up the AMT, and I wasn’t the second person to do it either. All I pointed out was that the AMT makes my point stronger and yours weaker.
Again, I acknowledge that I said “The AMT does not allow property interest deductions.” And I said that was a typo and should say property *tax* deductions. Find me another supposed “typo” if this happened repeatedly as you said. I’m not seeing it.
[Editor’s Note: All the relevant dialog has been moved to above. And no comment from anonn containing any links was removed.]

I had never seen the 6:12 posts — why does it have brackets around anonn’s name? I will respond:
anonn — Let’s get it out there — you have made mistakes in every single calculation you have provided in this thread. I think you’re trying to distract everyone from that with this imagined AMT thing. I have acknowledged the errors I have made (for example, I pointed out the 10% down payment error before you did and provided corrected numbers), and you never have acknowledged your own. For example, you never explained why your own calculation didn’t include property tax, and multiple people have pointed that out, including me. What is the explanation? Why didn’t you include property tax in your calculation?
You’re trying to focus on an imagined AMT error that I made in order to distract people from your larger errors in this thread when you criticized the editor for providing proof of a loss. The “crux” (a word you keep using) of the matter was whether you included property tax in your calculation, which you didn’t, not whether the AMT fits into the calculation (again, you referred to the AMT first, not me — it was completely irrelevant to my post at 3:58).
Again, the AMT makes my point stronger, so the more you focus on it, the more it highlights your poor calculations.

That’s 65% on the primary and 10% on the secondary. Let’s assume 5.5% interest (to be generous) on both, even though the primary would be higher as a jumbo at this point in 2004, and the secondary would be higher anyway.
1,496,250 * 0.055 * 5 = $411K
taxes = 23K * 5 = $115K
equivalent rent according to anonn = $60K/year * 5 = $300K
tax avoidance = assume 38% according to anonn of up to $55K per year (0.055*1M) of mortgage interest and $23K of property tax * 5 = $148K
That’s $411K + $115K + 6K HOA paid less benefits of $300K and 148K = 84K paid out
On the other side, we have 205K profit – 2.2M*.05 agent fee – $16.5K transfer = 78.5K return
So you have a 5.5K loss relative to renting on $498,750 “investment” or a 1.1% loss over 5 years on an asset that didn’t beat inflation over those 5 years. And that’s assuming it was a 5.5% for both mortgages and no closing costs and no maintenance other than HOA.

“for everyone else a new comp. says it costs 10% more to buy a similar place than it did in spring of ’04”
Sure sparky-b, that’s fair, but it’s also fair to say that it’s a 10.2% drop from the August 2005 sale of 1442 Kearny for $2,450,000, which appears to be a roughly identical square footage condo in the same building.
(It’s one thing to say that I made “assumptions.” But it’s another to say that those assumptions are distorting the situation in my favor or otherwise reasonable. Note that my assumptions are most favorable to the seller — 5.5% interest and a 38% tax rate, and they aren’t unreasonable.)

ALL DEDUCTIONS ARE LIMITED OVER CERTAIN INCOME LIMITS – NO AMT IS REQUIRED.
This has ***NOTHING*** to do with AMT. NOTHING. GOT IT? NOTHING TO DO WITH AMT. If you make over about $160K, schedule A deductions are limited.
READ LINE 29 OF YOUR SCHEDULE A: Is form 1040, Line 38 over $159,950 (over $79,975) if married filing separately):
The YES box says “Your deduction may be limited. See Instructions for the amount to enter”.
Last year, my schedule A lists $X,000 in state income taxes and yet my schedule A deduction is $(X-11),000. It’s because the deductions are not fully allowed when you hit that level of income.
It HAS NOTHING TO DO WITH AMT. I’M NOT SUBJECT TO AMT. I GET HIT WITH THE DEDUCTION LIMIT EVERY YEAR. If I try to deduct mortgage interest and property tax, that too will be reduced.
I’ve checked it and the total reduction for both is about the amount of the property tax deduction, so ignore the property tax deduction when trying to identify the tax savings. WHETHER OR NOT YOU ARE SUBJECT TO AMT!!!
I brought up the IRS code section last year anonn. We’ve been through this before: EVERYONE IS SUBJECT TO THE LIMIT IF YOUR INCOME IS HIGH ENOUGH. EVERYONE. EVEN IF YOU ARE *NOT* SUBJECT TO AMT.
http://www.flatworldknowledge.com/pub/1.0/fundamentals-income-tax-theory/39194

The comments that I thought were deleted must have been lost in cyberspace. (Note that the people talking to me don’t exactly have the most credibility at the moment, having both admitted error two or three times at least.) The other comments that I assumed were deleted were lost in cyberspace for at least an hour while being switched from the Bernal Crescent st. thread. I see this morning that they showed up.
The property is a two unit. Small HOA fees are common.
Taking a flat 7% for closing costs is a decent quick rule of thumb for a conservative ballpark figure, which basically assumes a 6% brokerage fee. It was not. It was a 5% brokerage fee.
Actually doing the math of 2.2 X .05 + 2.2M slotted into this calclulator (http://www.bartlettre.com/sellers/transfer_tax.php) yields a 127.5K transfer fee. 77.5K profit.
The 10% down assumption was just an exercise. Ten percent down purchases were very common at that time. But forget that. Let’s look at what actually went down.
sfrenegade assumes that they were subject to AMT. Otherwise, property tax is deductible. I will allow that. He rounded up to 23K, and then multiplied by 5, creating a $1000+ discrepancy. I will allow that.
Sfrenegade also assumes that they deducted a rather lowish tax figure. I asked him to google AMT property tax strategies, and provided a link. Apparently he googled the definition, after botching it at least twice (later calling the very thing we were arguing about “a typo”) but stopped short of reading the strategies.
Money outlay. 1.496M X .055 X 5 (assuming they didn’t get a very low first, also common at the time) = 411,400
Polip said that such places went for $7500 around that time. Since everybody jumped down my neck without cause, yet felt totally fine with using a rather low rent number, screw ’em. Let’s split the difference between 5000 and 7500 per month. So 6250 X 12 X 5 = 375K
411.4K (outlay) + 115K property tax (assuming AMT) + 6K (HOA) = 532.4K (expense)- 375K (otherwise rent) – 148K (renegade’s tax savings, not mine) = 9,400
A relative 9,400 expense yielded a 77.5K profit. And they kept the 200K down payment that a lot of people lost during this timespan. Not bad.
[Editor’s Note: Perhaps we’re not being clear, but “transaction costs” need to include both those at the time of sale (which you calculate above) and the time of purchase (the “closing costs” we’ve noted a number of times). And we happen to believe there’s a lot more credibility in admitting a mistake than not.]

“sfrenegade assumes that they were subject to AMT. Otherwise, property tax is deductible. I will allow that.”
That is a lie. I said that the AMT makes my calculation better, but that my calculation still shows a money loss under the normal tax code. I have always said property tax is deductible, and if you look at my 11:21AM calculation from yesterday (several hours before you started the imaginary AMT nonsense), you can see I included property tax in the deduction — 77K = 55K interest + 22K property tax, then I took 30% of that (assuming 21% federal, 9% CA tax, because that’s about what I paid last year) as the reduction.
This is getting tiring, anonn.
1) Prove that I “repeatedly” made “typos” about the AMT. This will show your affirmative case.
2) Prove that I “relied” on anything to do with the AMT in my calculation. This will show that you haven’t wasted our time with this imaginary AMT nonsense.
3) Explain why you never included property tax as a cost in your 3:05PM calculation from yesterday. This will show why your original calculation is unimpeachable.
Unless you do those 3 things, you have no credibility here, and you’re just making noise and hoping something sticks. This is just a distraction from the fact that this guy probably lost money relative to renting, which is all the editor and I ever said.

You have never shown where I made more than one “typo.” You have also never shown where I assumed they were under the AMT — to the contrary, you assumed they were under the AMT in your 4:29PM post and then projected that onto me. The record is pretty damn clear.

^ Sounds plausible…

Hmmm. “lost money relative to renting, which is all the editor and I ever said”
Yup. You both said they lost a TON of money, when they plainly didn’t. You can go back and own that one at any time.
YOu know, the 43% loss? the 75% loss? the editor said those things.
Because,
“SocketSite’s analysis at 1:22PM is right on” – – said by you, referring to a bogus numbers crunch by the editor, which he later owned up to.
“irrelevant because it’s a condo” — you also oddly said that flame, for no real reason.
Why? Why did you insist on picking numerous points of contention? It didn’t even begin with crunching numbers!
“The AMT allows deduction for mortgage interest if that mortgage interest is paid on real actual home improvements. The AMT does not allow property interest deductions. —
you said that @ 4:42 p.m., and you wish to call the crux of the issue a typo. I’m a trained editor. Typos at the crux of an argument? Usually they’re proofed, and reproofed. Color me very skeptical.
You keep harping on me and property tax. Initially I wanted to deduct it, as people often do. You didn’t allow me. Why don’t YOU crunch the numbers where they DO deduct property tax? For the sake of intellectual honesty?
And Tipster, when you buy a property and deduct interest, do let us know what you did. Otherwise what you’re saying about what you did not do, that was not available to you, which you did not look into a the time, holds no water.

I included property tax as a COST. Then I included property tax as a DEDUCTION. You have to do both.
Fair enough. I see what you did. Yes, I understand that a multiplier is used to determine deductions.
I’m tired of this already.
Can we agree that this site needs an edit function very, very badly?

I’m not unfair. You choosing not to admit you gave creedence to the editor’s 43 or 75 percent loss statement without doing your own math is duly noted. So is your failure to acknowledge that you were spoiling for a fight, vis a vis the “condos are irrelevant” flame.
Property tax does have to do with AMT tho. You cannot deduct it if subject to AMT. You know this. So what did you mean by that statement?
Comparative rent was likely higher. Deductions might have also been higher. Agreed?

*Deductions* would not be higher — you mean that *tax avoided* could have been higher,
Not true. There might have been a lot more deductions. Who knows?

My understanding is that the phaseout purchase debt interest AMT multiplier, going backwards, over the preceding years, could have generated larger deductions than a flat number applied across the spectrum.
It also could have gone the other way entirely. What if they don’t have jobs? What if they only pay capital gains on inheritance?
Who knows?

Turbotax and Tax cut do it for you
You’re not joking, and that’s OK. For you, now. Because you don’t own a property.

Well, sure they could not have jobs or live off inheritances, but I think we were both going for a typical wage-earner scenario.
Re: the AMT thing — mortgage interest deductions don’t phaseout under AMT as they do for non-AMT, so that might produce a little bit of difference. But both are still subject to the $1M cap because, IIRC, the AMT imports mortgage calculations partially from Schedule A but makes a few adjustments for home equity loans not used for the home. In 2010, the non-AMT phaseouts for itemized deductions disappear, so that difference goes away soon.
I don’t quite know what you mean by “multiplier, going backwards.” It sounds like you’re talking about the change in marginal tax rate, but I’m not sure.

Oh please. I’m not trying to get involved in this pissing contest, but I must say that Ma & Pa Homedebtor are notoriously bad at calculating true returns. I have a co-worker who thinks she’s up on her house because she paid $700K and similar places still sell for $800K+ today. She completely overlooks the ~$300K she’s spent endlessly renovating/updating it over the past 5 years. Then you have the dolts who multiply a simple return by 5 because they only put 20% down. I guess they have free mortgages? Typical seller’s math is exactly as RenterAgain posted from my anecdotal experience.

To be honest with you, thats probably becasue the average homeowner/debtor doesn’t care much about the notion of true return. You can argue they probably should, but they don’t.
Fact is, I doubt the sellers of this place went into half or even a quarter of the detail of calcs redone, revised, revisited here on this thread – and they were the people who owned the place.
Which I find quite amusing.
As has been said, they were probably happy to come out with a fair amount of cash in their pockets come the sale, and good luck to them.

1442 is trying its chance at 2.395M
Good luck on that one.