Mortgage Interest Deduction is Illusory

Furthermore, if your price is $10 per widget, you DO NOT make $9 on your last widget, do you? No. You make the same $5.04 you make on each other widget. You can't just choose to sell the last one and book a $9 profit. Not allowed.

I'll note with no surprise at all that after my examples were posted, Steve made no effort to refute the facts that: using the marginal rate is often precisely correct; using the marginal rate is essentially always more accurate than using the effective rate; and using the effective rate is essentially never accurate.

Instead of engaging in a fact-based discussion about actual taxes, he insists on twisting the conversation into one about how you would account for theoretical profits on widgets. I guess that's one way to avoid admitting that you're wrong.

jordyn, let's see those numbers reposted.

"your marginal cost for producing a widget is $1. The total cost for producing 100 widgets is $500. You produce 101 widgets, your total cost is $501. It cost you $4.96 to produce each widget, not $1, the cost of the last widget."

It's the area under the curve that matters, not the margin. That's your total tax savings, not your marginal tax savings.

Don't worry jordyn, rest assured that in a week, steve will proudly be proclaiming that you never once even attempted to provide any calculations at all, while he quoted 100's of academic papers. You can link him this very thread (I love doing that) and he'll still insist you never even attempted any calculations.

Why is he talking about profits and marginal cost of production? Perhaps the cost of tea in China also supports his claims? Neither have anything to do with IRS tax law.

Ignoring comment by tech_guy

steve, do you not mind that at this point, everyone on this site, including the bears, considers you a hack and just plain weird? The oddest thing is that you actually raised this topic again when either: a)know you are wrong on this issue but keep trying to defend yourself for some insane reason, b) you are completely delusional, or c) you are extremely dim-witted. I used to believe that you knew you are wrong but were just too arrogant and stubborn to admit it, but now I think you are a combination of all three.

Steve, I'm forced to ask again whether you can read. LICComment reposted the numbers several posts ago.

To make this painfully obvious: It is the last post on the first page of this thread. To get there from here, click on the "< prev" link on this page, and then scroll to the bottom of the comments to find the last one.

Here, I'll just post it again.

Here is jordyn's example - using actual tax rates instead of steve's made-up nonsense. How many different ways can people show the stupidity of steve's conclusions?:

"Steve, let's demonstrate something with actual number so you can see how silly it is to use effective tax rate. I'll do two scenarios, including one that is most favorable to your position.

For simplicity's sake, let's say you're single, your AGI is $250K and you have $20,000 in deductions other than your mortgage payment. (I'm ignoring AMT, but also ignoring state and local taxes, once again for simplicity's sake.) You'd be in the 33% federal tax bracket, but you'd owe $61,651 in taxes so your effective tax rate would be 24.6%. Now you get a $35,664 mortgage tax deduction. This lowers your taxable income from $230K to $194,336 and lowers your tax due to $49,882. The $11,769 decrease in your taxes is exactly 33% (your marginal tax rate) of your mortgage interest. This doesn't "favor" your mortgage deduction, it treats it identically to all of your other deductions, which also get the same tax treatment. We can add on about another $30,000 worth of deductions before this matters, and I picked an AGI about halfway into the bracket.

However, let's compute this in the way that is most favorable to you. Let's say your AGI is $184,551 with the same $20,000 of non-mortgage deductions, which puts you $1 into the 33% bracket. You owe $40,053 in taxes, making your effective tax rate 21.7%. Now you add the $35,664 mortgage deduction, which reduces your tax owed to $30,067. In this case, essentially all of the effect of the deduction is in the 28% bracket. Even in this scenario, where you would otherwise be exactly on the border of the two tax brackets with the largest change in rates (i.e., the scenario that most favors the point you're trying to make), using your marginal rate gives a result that is $1783 off. Using your approach of using effective tax rate, you'd end up with an answer that is $2247 off. So, in the best possible scenario for you, using marginal tax rates is still considerably more accurate than using effective tax rates. As demonstrated above, in many cases using marginal rates will give exactly the right answer; unless you earn less than $8,000 or your tax deduction eradicates your income entirely, using effective tax rate NEVER provides the exact answer."

You need to understand some history about steve. He reveals a ton of personal info on this site, and its been established that: He job hops a lot, and never up the ladder. He's currently a typist. He made a killing on his apartment, bought at a low, sold in 2006. He lost that killing with incredibly stupid bets on emerging markets, then betting the wrong way several times on the US market (see the famous "Dow 6500" line, which he simultaneously claims was a correct call, and a call that he never made).

Real estate was his only success, ever. And he blew the profits from it. He *needs* another bust and followup bubble. How else can he make any money? This is incredibly personal to him. And naturally, he approaches it with similar intelligence / ability that he approached his previous jobs, which is probably why he doesn't have those jobs anymore.

I have no idea why I let myself get sucked into arguing with someone who essentially responds "no, you are wrong" without providing any insight as to why... Good Lord, the widget example doesn't even make sense as written.

"ignoring comment by tech_guy" Hahaha - yeah right.

what are the chances that the gov will get rid of the mtg interest deduction in an attempt to increase revenue while having huge deficits?

i understand it could be unpopular, but wouldn't it be less so than an increase in marginal rates or payroll taxes?

LICComment reposted the numbers several posts ago --> Ignoring comment by LICComment.

However, just to humor you, I'll look....

"For simplicity's sake, let's say you're single, your AGI is $250K and you have $20,000 in deductions other than your mortgage payment. (I'm ignoring AMT, but also ignoring state and local taxes, once again for simplicity's sake.) You'd be in the 33% federal tax bracket, but you'd owe $61,651 in taxes so your effective tax rate would be 24.6%. Now you get a $35,664 mortgage tax deduction. This lowers your taxable income...."

WRONG. Your $250,000 in income is STILL taxable income. Any deduction that occurs on the back half of your 1040 is a deduction from TAXABLE income. Exclusions and exemptions are taken on the front part of the form. They are treated differently.

So that's the first mistake. Not surprising, since on another post LICC (or was it alter-ego tech_guy?) didn't know where AGI was taken from. Nonetheless....

Your taxable income does not go "from $230K to $194,336"

It stays at $250,000. At that rate you would have an average (effective) tax rate of 26.27%, for total federal tax due of $65,675. Your take home pay would be $184,325.

THEN you apply your $20,000 in deductions. Because of phase-outs, you would still be in the 33% tax bracket, but you'd have a marginal rate of 33.66%, and an effective rate of 24.59%, meaning that your total tax bill would be $61,475.

In this case your marginal rate goes UP, but your effective rate goes DOWN.

Now add in LICC's $35,664 in mortgage interest. Your marginal rate remains 33.66%, your bracket remains 33.00%, your effective tax rate is 19.88%, your total tax is $49,700.

http://www.dinkytown.net/java/TaxMargin.html

You have paid $35,664 in mortgage interest. Your tax has gone down $11,775, which is approximately 33% of your mortgage interest, but only 19% of $61,475.

NO ONE DOUBTS that each next deduction is taken at the marginal rate. But your tax is reduced by your effective rate.

The mortgage interest deduction is worth exactly the amount it reduces your tax by, which in this case is $11,775 / $61,475. It's worth 19% of your total tax bill, not 33% of it.

That's why LICC = tech_guy is/(are) wrong.

steve has really evolved into the most arrogant dumb person I have ever seen. His analysis shows such a fundamental lack of understanding of simple concepts that I wouldn't even know where to begin. He so can't admit that people he argues with are right and he is foolishly wrong, that he just digs himself deeper trying to defend his nonsensical argument. The man doesn't know the difference between adjusted gross income and taxable income! He doesn't understand what an effective rate is! What a joke.

The simplified version is that steve made up a straw-man argument, attributed it to me, and (correctly) proves it wrong in a post 10x larger than it needs to be. The straw-man involves the percentage of your current tax burden that can be attributed to the mortgage tax deduction. Its really quite ridiculous - I don't think anyone uses that number for any analysis, anywhere. Certainly not for rent vs. buy math.

LICComment,

You may very well be right (though I've met a few really arrogant dumb people who may give him a run for the money).

My question is why are you allowing him to jerk you around? You know he will never ever admit you are right and he is wrong. The solution is the "ignore this person" button. Otherwise I'll have to start wondering who is really the dumbo in this thread!

Personally, I find this amusing. Its like a car crash - you know you shouldn't look, you know you're wasting your time slowing down to stare, you know you're troubling others by slowing down, yet you still can't help yourself. Only with a car accident, I feel guilty as often there are innocent people severely affected. Here, no guilt at all, just amusement :)

steve wrote: "WRONG. Your $250,000 in income is STILL taxable income. Any deduction that occurs on the back half of your 1040 is a deduction from TAXABLE income. Exclusions and exemptions are taken on the front part of the form. They are treated differently."

Steve, please go examine IRS form 1040. Look at Line 43, entitled "Taxable Income". See how it is computed in the previous 5 lines. Effectively, it's "AGI minus itemized deductions minus exemptions".

If we can't use the same terminology as the IRS in discussing taxes, there's really no point in trying to have a conversation.

By the way, your analysis confirms that amount your taxes decrease by is essentially "mortgage interest paid times marginal tax rate", which is what everyone else has been arguing all along. Good job.

entitled "Taxable Income".

You are correct. My bad.

'your analysis confirms that amount your taxes decrease by is essentially "mortgage interest paid times marginal tax rate"'

No one has ever doubted that, but that is not the TAX BENEFIT. The tax benefit is the percentage by which your tax falls. It does not fall by 33%.

But do it any way you want to get you your happy answer. And if the tax law changes, or you lose your job, then come back to me and tell me what the tax benefit was. Not 33%, but the amount of extra tax you'd have to pay because of it.

Thanks modern. I'm not bothered by steve in the least. I'm with tech_guy - it is amusing to get under the skin of such an obnoxious, arrogant, pretentious doofball like steve. I'm also glad that by exposing him, he is less likely to influence anyone else who doesn't know him better.

The tax benefit should be measured by the amount you would save if you otherwise didn't have the deduction. If you are in the 33% tax bracket, you would have paid 33% in taxes on the income that you otherwise deducted. If the deduction drops you from the 33% bracket to the 28% bracket, you can proportionally measure the benefit based on the portion of your income that would have been in the 33% bracket and the portion that would have been taxed at 28%. You would never measure the benefit by your effective rate, would incorporates all tax brackets, or by the percentage of your total tax bill, which is meaningless for this discussion. steve's ideas really are just plain stupid.

Ahem: http://www.streeteasy.com/nyc/talk/discussion/6009-same-apartment-for-rent-and-for-sale

"Mortgage interest (and all other deductions) are a) deducted at your average tax rate, not your (highest) marginal tax rate" - stevejhx, 2 weeks ago

When I tried to pin him to real numbers: "It means that your average rate may be close to 28%, but it is NEVER 28%." (emphasis his)

And on: "effective tax rate: Actual income tax paid divided by net taxable income before taxes, expressed as a percentage. That's what you use. The actual amount you pay divided by how much taxable income you have. It will approach your marginal rate, but never get there."

Another quote I want to throw out there, just because its hilarious. I mentioned how I calculate tax on the opportunity cost. He replied: "Dude, you deduct the opportunity cost from the cost of owning. No one has a 15% interest rate. I don't know what the long-term capital gains rate is."

Ignoring comment by LICComment = Ignoring comment by tech_guy.

jordyn, do it the other way around. You lose your job. You have no income. What is the tax benefit from your mortgage interest?

$0.00. 0.00%.

What is your net tax rate? 0.00% What is your marginal tax bracket? 0.00%.

Let's say they raise the top marginal rate to 35%. Is the mortgage interest deduction suddenly worth 2% more? Or 6% more? What is it worth compared to how much tax you paid before?

A tax benefit is calculated based on the benefit it gives to you in taxes paid. It's the definition of a tax benefit: a benefit on taxes. There is no benefit to your mortgage, or to interest. The benefit is to your taxes.

How much do your taxes change - that's the benefit. And if you're in the 33% tax bracket your taxes do not change by 33%.

"Personally, I find this amusing. Its like a car crash - you know you shouldn't look, you know you're wasting your time slowing down to stare, you know you're troubling others by slowing down, yet you still can't help yourself."

Exactly

"I'm also glad that by exposing him, he is less likely to influence anyone else who doesn't know him better."

Also correct. LICC has a long history of proving steve wrong and it drives him nuts.

Treasury Should Consider 100-Year Debt, BlackRock’s Fisher Says
http://www.bloomberg.com/apps/news?pid=20601087&sid=azGBEQQJhY24&refer=home

something tells me that this discussion is going to be anacronic very soon. the deductibility is going to disappear 1st for second homes, then for homes more expensive than conforming limits (whatever they final level will be). as stiglitz pointed out, the bulk of this transfer is going to the wealthy. to make it fair you'll need to issue a mtg interest "credit" to those on lower tax brackets. again, not feasible with the deficits we will be running.

LICC has a long history of proving steve wrong and it drives him nuts."

It drives me nuts, or it drives LICC nuts? Because LICC is wrong on all accounts. A tax benefit accrues on taxes, not on anything else.

Remember, JuiceMan, you were so very happy that overnight LIBOR had fallen - it's now 1.09%. And then there's this gem from a year ago, in response to malraux's "where are all the idiots who made the 2007 doomsday predictions?!?":

JuiceMan
about 11 months ago
ignore this person
report abuse

urbandigs, I think you found the ideal target market for your new site - all those folks who think the world is going to end. They are easy pickings and you can certainly rile them up with all of your catastrophic bullshit. Not sure how that helps your broker business, but the site will get plenty of hits. Shouldn't you be helping to restore confidence?

OR this one:

However, I would challenge that what you feel is impartial and unbiased information regarding macroeconomics is painfully jaded by the media, “wall street experts”, and maybe even Suzie Orman (ok, maybe not but I saw her name in this thread and couldn’t believe it).

How about posting some threads about increased U.S. retail and service activity by our Canadian neighbors? What about the increase in U.S. manufacturing based on strong demand for cheap exports? Doubling of foreign tourists in NYC? Foreign real estate investment in NYC? How about European car manufacturers plans to add plants in the U.S.?

Urbandigs, you are quick to state that we are ignoring macro indicators, but by ignoring positive and potentially offsetting trends in the economy, I feel you are contributing to the overly negative sentiment rather than providing truly unbiased advice. This is of course different than providing your opinion (which you are obviously free to do) but please don’t mask it as impartial.

OR MY FAVORITE ONE:

JuiceMan
about 11 months ago
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report abuse

No one has denied the impact of the credit crisis billshiers, I'm not sure why not being pessimistic equates to denying reality. What you and others fail to acknowledge is some positive indicators that MAY help offset some of the downturn of the economy. If you look at the issue from both the bull and bear points of view and take time to form a balanced opinion, you may gain some confidence that the "stealth softness" could be short term thing and that these clouds will eventually clear up. I think this article from the journal nicely sums up both the challenges and opportunities for 2008. We are not in a crisis.

http://www.streeteasy.com/nyc/talk/discussion/2651-where-are-all-the-idiots-who-made-the-2007-doomsday-predictions

"We are not in a crisis."

You were wrong then, you're wrong now.

> The tax benefit is the percentage by
> which your tax falls.

No it is not. The tax benefit is the AMOUNT which your tax falls.

> It does not fall by 33%.

Well, this gets complicated, but its actually usually MORE than 33%. My accountant pointed this out to me. Its not just the marginal "rate" that matters, you also have to factor in all the other deductions you lose as income goes up. All the stuff that gets phased out in high incomes. My accountant pointed out that my marginal rate was closer to 50%.

Motherfing government..

stevejhx, there's a difference about being wrong about a prediction, and being fundamentally wrong about analysis... And then, there's another difference between admitting when you are wrong, and selectively choosing ignorance as you continue to do. Good luck with everything!

Let me further quote you:

"You have missed every other prediction you have made by a long shot. Do us a favor, go back to your gold trading and leave the forecasts to someone who has a clue."

To MMafia.

Do you have anything positive to say about 2008? Are there any possible scenarios where a downturn won't be as bad as the indicators say? Oh, and if we are in a recession right now, I would have to say that prices have held up pretty good eh?

To urbandigs

spunky, will, Malraux, a brewskie to each of you for sticking to your guns and for not jumping on the doom and gloom bandwagon.....

To everyone!

spunky, I'm afriad this thread could be very quiet over the next couple days. Good luck finding your next property.

To spunky.

You will not see quality West Village and Upper West Side (and other great neighborhoods) properties correct by 10-15%.

Anyone with a time horizon longer than this year will be happy they invested in Manhattan real estate. This downturn will be short, and even shorter for Manhattan real estate. You can continue to post about all of the issues facing the economy, but fact is if you are waiting to pick something up on the cheap, you will be disappointed.

To faustus.

“The current stock and asset bubble will deflate by the end of the year as predicted. Remember my promise for Dow at 11,000 before the ball drops.” – zizizi

zizizi, Are you really in the position to question the financial decisions of others after making the #1 bonehead prediction in Streeteasy history? Are you now ready to share more wisdom with the masses?

To zizizi.

I thought we were already in a recession? If so, open houses were buzzing this weekend, but wait till the spring hits. We'll really be hurting then! Guess we have to wait for all of the doom and gloom to spread to actual buyers of NYC real estate.

And that, JuiceMan, is just after 3 pages of a 15-page thread.

At least I'm man enough to admit the (few) times I'm wrong - and not this time. You have a long history to apologize for, so I wouldn't be throwing stones if I were you.

Usual steve tactic - try to divert the subject when he is totally wrong and looks like a complete fool.

steve, I stand buy all of these posts. Read them, they are pretty good and for the most part dead on, until Lehman happened. Which by the way, you took a friggan bath on and almost ruined yourself financially. So who was right and who was wrong there?

One thing I WILL take back is my post to Urbandigs. I didn't trust him at first, but he proved me wrong. He and MMAfia are the two folks that called what would happen most accurately. You…….not so much.

"stevejhx, there's a difference about being wrong about a prediction, and being fundamentally wrong about analysis..."

That's illogical. A prediction should be made on an analysis, lest it be mere finger in the wind.

"And then, there's another difference between admitting when you are wrong, and selectively choosing ignorance as you continue to do."

When I'm wrong I say I am, but your tax benefit is not at your marginal tax rate. It's how much your taxes change by.

stevejhx: "When I'm wrong I say I am, but your tax benefit is not at your marginal tax rate. It's how much your taxes change by."

And the correct way to calculate that is by your marginal rate, not your effective rate. Hope your ignorance is at least blissful!

> Read them, they are pretty good and for the most part dead on, until Lehman happened.

So they were 100% correct until they were wrong...?
;-)

What are you, running for president or something?

"And the correct way to calculate that is by your marginal rate, not your effective rate."

That's absolutely true. That's just not its percentage value. That's the difference.

"Read them, they are pretty good and for the most part dead on, until Lehman happened."

No, actually, not at all. Real estate started to tank long before Lehman. Sorry.

"Which by the way, you took a friggan bath on and almost ruined yourself financially."

I've lost money, true, but I also have plenty of cash. I did not predict the worst financial meltdown since 1933. You're right. Neither did anyone else.

But real estate was bad long before then. Just fess up you were wrong.

Now steve has changed the argument to definitions. He can't win on rent vs. buy math, so he redefines the words we use in the arguments against him to pretend he won. He screams on and on that the words we use mean the percentage of tax burden, even though nobody with any intelligence would consider that.

I think its a fun game. Let me play:

stevejhx: "But real estate was bad long before then. Just fess up you were wrong."

By "real estate", he really means "stevejhx's life", and by "wrong", he really means "much smarter than me".

The fact is that if you want to compare your cost of owning to your cost of renting, you can't ignore the reduction in ownership costs that you receive from tax deductions, as steve thinks you should. And you cannot measure the tax benefit by your effective tax rate, which would underestimate the benefit, because that is stupid. You should measure the benefit, and thus reduce your ownership costs, using your marginal rate, which is much more accurate. This is simple. This also makes steve's 12x ratio argument just dead wrong, looking at practical, real-world numbers. Now steve, instead of admitting he is wrong, tries every misleading, incomprehensible argument possible to fool people into thinking he knows of what he babbles.

Ignoring comment by tech_guy = Ignoring comment by LICComment

Steve - the bottom line when you are doing a rent vs buy analysis is to compare the DOLLARS leaving your pocket when you rent versus when you buy. It all comes back to the dollars. Using the MARGINAL rate will overestimate the tax advantage when the interest payment is offset against income taxed at a number of different (lower) tax rates. However, for most high-earners (i.e. Manhattanites), using the marginal tax rate to do the calculation gets you pretty close, whereas the effective tax rate will usually seriously underestimate the tax advantage. I know, because I've built the spreadsheet and done the calculations for myself. If you can't see how this works, consider the example of a married couple earning $500k in taxable income with 100k in deductible mortgage interest ... ALL of that interest would be deductible at the highest 35% federal tax rate and would return $35k into their pockets (i'm ignoring non-federal tax rates for illustrative simplicity).

Furthermore, you keep ranting about your BA in econ from George Washington. Show me one person who cares!? I have prostgraduate qualifications in both economics and finance from comparable (if not better) universities, and actually work in finance. You are wrong, but more importantly you cannot admit being wrong. It is tiresome. Give it up.

steve, please ignore my comments, too: you're a douchebag. i suggest you double your take of meds and find a more effective therapist.

I don't have a single economics or financial degree, certification, or job (past or present). Yet I know this stuff 100 times better than steve.

"know, because I've built the spreadsheet and done the calculations for myself."

Impressive.

But you're still looking at it - percentage-wise - incorrectly. OF COURSE the deduction occurs at your marginal rate. No one has ever denied that. The question is, how much is the deduction worth to you? It is worth PRECISELY the amount it changes your total tax bill, which is your effective (average) rate.

It is a TAX benefit, not a MORTGAGE benefit, or an INTEREST benefit. If my total tax falls from 30% of my taxable income to 25%, then the benefit is worth 5 percentage points.

Those of you who've drunk the real-estate Kool-Aid will insist that I am wrong - and fine, I'm cool with that. Do the calculation the other way around. Let's say you fall from the 33% tax bracket to the 27% tax bracket. Is all of a sudden the tax benefit worth less? All of a sudden are you paying more for your place to live?

No. You're paying the exact same amount. It costs you the same. You have to pay more tax, however.

Or do you?

No. Because you make less income.

There are 2 tax brackets. $0 to $50,000 is 25%. $50,001 to $250,000 is 50%.

You make $100,000, are in the 50% tax bracket. Your tax is ($50,000 * 25%) = $12,500 + ($50,000 * 50%) = $25,000 = $37,500.

Your monthly mortgage is $1,000, of which $800 is mortgage interest. So you save $400 a month in tax at your marginal rate * 12 months = $4,800. $37,500 - $4,800 = $32,700 in total tax paid.

Your income falls to $50,000, you are in the 25% tax bracket. ($50,000 * 25%) = $12,500 in tax. Your monthly mortgage is $1,000, of which $800 is mortgage interest. So you save $200 a month in tax at your marginal rate * 12 = $2,400. Your total tax = $10,100.

In the first case the tax benefit is worth $4,800 / $37,500 = 12.8% of your total tax without the benefit.

In the second case the tax benefit is worth $2,400 / $12,500 = 19.2% of your total tax without the benefit.

You're in a LOWER tax bracket, but the tax benefit is worth MORE to you as a percentage of your tax paid.

In the first case your effective rate is 32.7% after the benefit. In the second case your effective rate is 20.2% after the benefit. But clearly, as a percentage of your tax paid, you're better off in the second case.

"Do the calculation the other way around. Let's say you fall from the 33% tax bracket to the 27% tax bracket. Is all of a sudden the tax benefit worth less? All of a sudden are you paying more for your place to live?"

Yes. Until you understand this very simple and trivial concept, you'll never understand how to value real estate.

steve does have the ability to babble more and more nonsense without actually saying anything intelligent. He has no response for Jordyn, no response for cmt, no response for what I stated above. Why does he constantly use made-up tax brackets? Because when he faces reality he knows how wrong he is.

I have a headache

"So they were 100% correct until they were wrong...? "

Absolutley nyc10023. You get my point, NO ONE knew this was coming. I was batting a 1000 until Sept. Don't you think a few other people in this world were wrong about what happened then?

"At least I'm man enough to admit the (few) times I'm wrong - and not this time. You have a long history to apologize for, so I wouldn't be throwing stones if I were you."

I admitted I was wrong about Digs and MMAfia. I have never been wrong about you or some of the others you felt necessary to include in the posts above. I stand by what I said. Also, if you are so good at admitting you are wrong, you should start with everything you have typed in this thread.

Steve, feel free to be better off saving 19.2% of your total tax without the benefit. I'll happily be worse off saving "only" $4,800.

I think you all need to leave your apartments and get laid...it has obviously been awhile

I can't believe I've read through these comments.

But let me say a couple things as an observer.

If LICComment isn't tech_guy, maybe you guys should just develop a pact with each other and only one of you comment per discussion. You do seem a bit close to each other with every other post, similar positions, etc. Frankly, if you are the same person, just consolidate becase ...

Second, WTF steve, what goes through your head. Go get a glass of water and try to decipher this: A tax benefit is calculated based on the benefit it gives to you in taxes paid. It's the definition of a tax benefit: a benefit on taxes. There is no benefit to your mortgage, or to interest. The benefit is to your taxes.

or understand this: And if you're in the 33% tax bracket your taxes do not change by 33%.

If I'm in the 33% bracket, and I get a $100 deduction for whatever reason, call it a charitable contribution, I will save $33 on my taxes, so my net out of pocket for the charitable contribution is $67. What about that is so damn difficult?

And yes, of course the fact that mortgage interest is tax deductable makes housing more affordable and that naturally would in equilibrium tend to increase the cost of real estate. Just as if borrowing rates were to decline. Simple stuff.

Just one more thing, you seriously must smack yourself in the head.

You stated:
Your monthly mortgage is $1,000, of which $800 is mortgage interest. So you save $400 a month in tax at your marginal rate * 12 months = $4,800. $37,500 - $4,800 = $32,700 in total tax paid.
Your income falls to $50,000, you are in the 25% tax bracket. ($50,000 * 25%) = $12,500 in tax. Your monthly mortgage is $1,000, of which $800 is mortgage interest. So you save $200 a month in tax at your marginal rate * 12 = $2,400. Your total tax = $10,100.
In the first case the tax benefit is worth $4,800 / $37,500 = 12.8% of your total tax without the benefit.
In the second case the tax benefit is worth $2,400 / $12,500 = 19.2% of your total tax without the benefit.
You're in a LOWER tax bracket, but the tax benefit is worth MORE to you as a percentage of your tax paid.
In the first case your effective rate is 32.7% after the benefit. In the second case your effective rate is 20.2% after the benefit. But clearly, as a percentage of your tax paid, you're better off in the second case.

So in case 1 you save $4800 and in case 2 you save $2400. In case 1, you save MORE than in case 2. But your % is higher in case 2 so that's what you pick? Does that make sense to you? How about we meet tomorrow before work, I'll have $100 in my wallet and you have $1000 in your wallet. I'll give you 100% of what is in my wallet and in return, I only ask for 50% of what is in your wallet? Hey, you get double the percentage of me, how can you refuse?

admin, "what are the chances that the gov will get rid of the mtg interest deduction in an attempt to increase revenue while having huge deficits?"

I've wondered this too. Politics would work against it. Foreclosures are all the talk. Taking away the mtg interest deduction would aggravate it. If it weren't for this current situation, maybe.

lowery, check this article from the Financial Times,

if their numbers are correct, $40 Bl per year go towards the 12% more wealthy households. i see the chance for the deductibility to be income base and restricted to primary homes (no subsidy for vacation homes regardless of income level). that will bring more than $40 Bl more in revenue without being politically difficult to pass as it affects so little households.

http://www.ft.com/cms/s/0/f6f7dfa2-8bf1-11dd-8a4c-0000779fd18c.html

"The mortgage interest tax deduction was part of the original US income tax passed in 1913. It allows homeowners to exempt interest on mortgages up to $1m (£550,000, €680,000), plus $100,000 in home equity loans. Almost 40m homeowners claim it, for a tax saving of roughly $80bn a year. The measure has been much attacked – by conservative flat- tax advocates on the grounds that it sucks investment into residential property and by the left on the grounds that it is unfair. The level of regressivity varies with the property market. But in recent decades the richest 10 or 12 per cent of the people claiming the deduction have got about half the benefit.

The gimmickry and the unfairness interact in a mischievous way. The deduction is almost designed to overheat the housing market and push people towards “more house than they can afford”. That is because you cannot get this deduction for borrowing against an existing mortgage, aside from the $100,000 mentioned above. You can only get it on your “acquisition loan” or “first lien”. If you bought a house for $300,000 that appreciated by $700,000, you need to sell your house and move into a new one to unlock the full deductibility."

"deductibility to be income base"

sorry, it should be "deductibility to become income based"

After many months of reading countless threads debating this issue (marginal v effective), a lightbulb went off --

If a person's income straddles several marginal rates, the effect of their tax deductions and which deductions takes how much income down into which bracket, is complex enough to argue that marginal tax rate is the important factor

IOW, this is a possible argument in the scenario where someone's gross income/revenue barely reaches up into the bracket for which most Manhattan condo/townhome owners only need look at, since their taxable income will never be down under that top bracket.

So you're all talking past each other because you're in different income brackets. The person arguing for effective tax rate simply cannot understand what it's like to be earning $400,000 a year, and the people who earn over $400,000 a year can't remember what their tax picture looked like when they only made $115,000 a year.

How's that for charity? ;)

typo in second sentence above - s/b "is complex enough to argue that EFFECTIVE tax rate is ..."

"NO ONE knew this was coming."

JuiceMan, JuiceMan, JuiceMan! EVERYONE knew the real estate downturn was coming. EVERY fundamental was wrong: price-to-rent ratio, PITI ratios, price-to-income ratio, every other ratio I've posted. It was THE most obvious thing on the face of the earth.

What WAS unforeseeable was that Paulson would be so stupid as to let a bank go bankrupt, then demand the TARP, then not use it. You ridicule the money I lost (which I will recover w/i a year). I was fine EVEN after Lehman - I had lost profit, but no principal. I did NOT foresee that anyone could be so stupid. The Dow could have gone from 14,000 to 10,000 & I was fine. I did not foresee (originally) 7,500 - a decline like that had not happened since 1933, and it had no bearing to the fundamentals.

And it doesn't.

Still - I kept enough cash to pay a year's expenses if I make not another penny all year long.

You were WRONG about housing, JuiceMan. Admit it. Just admit it.

"you should start with everything you have typed in this thread."

JuiceMan, tax benefits are measured as a function of TAXES, not as a function of interest or mortgage payments.

rainer, that example is very trite. I have $100. You have $200. I'll wager you $100. Who will take the bet?

You will, I won't. Because it's 100% of my assets, 50% of yours. NO ONE who does this analysis in the way you propose looks at the downside risk. If you lose your income, your mortgage interest tax benefit is precisely ZERO.

ZERO. ZERO. ZERO.

That is why you must measure the benefit as a function of the taxes you pay, not as a function of the mortgage you pay or the interest you pay. You get NO mortgage benefit and NO interest benefit. Just a TAX benefit.

Just as in the wager example, you weigh how much of your principal you could lose: 100% versus 50%.

Huge difference in risk.

That's why your comment is laughable.

"I think you all need to leave your apartments and get laid...it has obviously been awhile"

Actually, I'm running 3 weeks in a row. Last Friday was the best.

steve, now i'm proud of you. wish you many more.

lowery, not a bad analysis. But it leads exactly to what I say: your marginal rate may be more, the same, or less than your effective rate, as marginal rates fall once AMT is phased out.

It's a TAX benefit, so it must be calculated as a function of TAXES.

What's so hard about that?

sad

"Actually, I'm running 3 weeks in a row. Last Friday was the best."

Oh, boy. TMI

"JuiceMan, JuiceMan, JuiceMan! EVERYONE knew the real estate downturn was coming. EVERY fundamental was wrong: price-to-rent ratio, PITI ratios, price-to-income ratio, every other ratio I've posted. It was THE most obvious thing on the face of the earth."

Ratio's are subjective and when you use them, they are very subjective. I have never argued the ratio, just numbers you embellish them with.

"You ridicule the money I lost"

I do not. I ridicule that fact that you are constantly on this board thumping your chest about how right you were all along when you just lost all of your money. The only thing that may cause you to be correct regarding your "ratios" is the very thing that you were most wrong about. Ironic isn't it?

I get it now Steve.

I have $200, you have $100. I have more than you.

However, Two hundred starts with a T and One hundred starts with an O, and O comes before T. Additionally, $100 is the square of an integer and $200 is not. Furthermore, $100 comes before $200 when counting up starting at zero. And lastly, you can actually have $100 with only one bill, whereas in order for me to have my $200, I actually have to have two bills. So I get it, your situation is better.

Thanks

No, I'm not tech_guy. We just agree on certain things, but we have disagreed on things in these threads. Our disagreements are handled respectfully and intelligently, like mature adults, which is impossible with steve.
steve must be blind to the fact that he is embarrassing himself with this entire thread and his insistence on an argument so incorrect that a 5th grader can see it.

> Our disagreements are handled respectfully and intelligently, like mature adults

Well, lets not get ahead of ourselves now...
;-)

Especially with the line that follows...

rainer, Juiceman - funny

"To summarize:..."?

your last post should be punished for verbosity

"If you were to go all the way back to 1928 and dissect the S&P 500 into rolling twenty-year periods,"

The SP500 did not exist before 1957.

steve, thanks for summarizing all of your incorrect, out-of-context, misapplied BS in one post. It was a terrific recap of ignorance.

Oh, boy. TMI

Hey, they asked.

"I ridicule that fact that you are constantly on this board thumping your chest about how right you were all along when you just lost all of your money."

I did not lose anywhere near "all of my money." 99% of humanity has lost money. Kewl. I still have plenty, JuiceMan. Not starving anytime soon.

So shift the argument away from ad hominem attacks, toward the truth: you were WRONG about real estate, when the signs were all there.

" SteveHanley," I don't know who you are, but like everyone else who has tried to assume my identity, I've reported you as an impostor, and an abusive one at that.

rainer, your post adds nothing to the argument.

"The SP500 did not exist before 1957."

It was interpolated backwards.

Don't you guys have better things to do?
You guys are talking to a dead brick wall here...someone who majored Spanish in College.

ba294. Economics. Graduate degree in Spanish, thank you.

Tell you what. You enroll in my program and I'll enroll in business school, see who comes out on top. There's a mighty steep learning curve in my degree, not to mention an awful lot of psychology, literature, religion, philosophy, and history.

Give it a shot.

What would someone possibly gain by getting a Masters in Spanish? How is that even practical in the world? So, sure, an MBA is an easy degree. But climbing a mountain or running a marathon might be very tough and personally rewarding and keep you in shape, but otherwise it doesn't have any practical use.

If you need a pat on the back, we'll give it to you. But then we'd suggest you move on.

Because I'm a Spanish translator, and I found it an enormous amount of fun and learned an enormous amount.

BTW I have a friend who's a retired physician and is studying to get a BA in Spanish at UC Riverside, not even a very competitive school, and he finds it eminently difficult. In fact, for the naysayers, Spanish is the most difficult department to get a PhD in at Columbia. Average time to degree 12 years.

They had to ease the requirements to satisfy the school's time constraints.

So: you take my degree, I'll take yours. You'd better hurry up, though, you have a lot of conjugating to learn how to do.

"Spanish is the most difficult department to get a PhD in at Columbia. Average time to degree 12 years."

i'm a phd from columbia. length of a phd shows level of commitment and focus more than difficulty. availability of financial aid is key too, as many departments ask you to work after the 5th year if they are not well funded. so, it doesn't indicate "12 years of intense work on the thesis" to me (which would show how difficult the topic is), but the opposite.

so far, nobody i've met from humanities (english, music, ...) seems to work at all in comparison to people doing their phd in business, economics, biology and chemistry, for example (sorry if it's politically incorrect, it's just my experience).

Maybe you missed it -
we are happy that you have fun and learned an enormous amount.

BUT, you may want my degree (and by the way I don't have an MBA but I'll take that side of the argument) but I don't want yours. Seems as if few do, other than a retired physician who is pursuing it for intellectual reasons - good for him but doesn't show real value to it, no matter how difficult it may be.

steve, I don't want to belittle your accomplishments (though I believe a PhD in Spanish is not one of them), but Spanish is not a particularly difficult language. If you want difficult, try Russian or Basque.

Steve,
I think I'll just keep my doctorate in medicine.

bjw, that is right, Steve doesn't have a PhD in Spanish, but he keeps talking about it even though he only got a Masters.

His statement is akin to saying: I ran the first mile of a Marathon, and a Marathon is really difficult, it takes longer and a lot more discipline than the 10K that you ran.

Fire away:

El basamento del area de estudio esta conformado por brechas hialoclasticas, sedimentos epiclasticos, basaltos, piroclastos, gabros y cumulitas de olivino. De acuerdo al mapa geologico para la zona del proyecto se reporta la presencia de los basaltos POC ( Plateu Oceanico Caribe), que son las rocas mas antiguas y constituyen el basamento de la formacion Tulin; a nivel local del AP las rocas estan muy meteorizadas y muy fracturadas, lo que provoca inestabilidad de los taludes en los cortes de los caminos, las rocas tienen un color café- rojizo, y sobre las mismas se ha desarrollado un suelo con un espesor entre 2,0 y 4,0 metros, con texturas de arena limosa y limos de color café y rojizos claro con trazas de finos, densidad relativa de medianamente densa a muy densa, con una estimacion de la resistencia medianamente rigida.

This is what I do.

no thanks, has no relevance to me or anyone else here nor is it relevant to the discussion topic

glad though that you could type in a foreign language ... as can all literate Spaniards or Latin Americans

Or maybe you want this:

Hongos: oreja de palo Auricularia sp.
Lepidoptera: Papilio cresphontes
Papilio anchisiades idaeus
Philaethria dido
Phoebis sp.
Termitas: Isoptera
Saltamontes: Orthoptera
Libélulas: Odonata: Anisoptera

Steve, somehow you make a lot more sense if you post in Spanish, even though I am still looking for my shoe shine guy to translate it for me.

"he keeps talking about it even though he only got a Masters."

More of the same.

Like I said, fire away - you think it's typing, type it in English.

Never fails, any discussion involving this guy - first everyone attacks his logic and no one defends it other than General Steve himself.
Then it breaks into attacks on Steve and his credentials and his personality.

In any case, let me add my two cents, or 12 cents that is ...

Steve, your two last posts - good one. By MS Word's count, that was 162 words, and at your rate of 12c, we the readers of Streeteasy owe you $19.44, so I suggest we split it up by each of the posters to this discussion topic and I personally will send you a paypal payment for 10.7cents if you give me your email address.

Steve, I'm fluent in Spanish, and while what you posted there is fairly technical, it's not particularly difficult. It's much tough to translate literature, in my experience. Also, your second post contains a lot of Latin - kind of disingenuous.

*tougher*

bjw2103, you are now confirmed as an expert in real estate and finance!

Stevejhx: Like I said, fire away - you think it's typing, type it in English

I never said it was typing. Its translating, I agree. Doesn't mean a high school student in Spain couldn't do that. Doesn't mean that your MA in Spanish has any worth. Doesn't mean you understand real estate.

bjw2103, literature can be extremely difficult, agreed, but this not particularly difficult?

What's it say?

Actually, you get paid in this business not for the language per se, but for your knowledge of the subject matter. The difficulty of the language is usually secondary - you have to understand what you're talking about.

"Doesn't mean a high school student in Spain couldn't do that."

Give it to one, find out the result.

"Doesn't mean that your MA in Spanish has any worth."

Nor does an MBA.

"Doesn't mean you understand real estate."

No it doesn't. Nor does an MBA.

"Latin - kind of disingenuous"

Not really. Not if that's what you're working on. This is from an environmental impact study.

Here's what an online translation program gives for the first sentence:

The epiclasticos plinth of the area of study this conformed by hialoclasticas breaches, sediments, basalts, piroclastos, gabros and cumulitas of olivino.

stevejhx, it's a detailed description of a geologic formation. Highly technical, as I said (I don't know what epiclastic and hyaloclastic deposits and gaps are), but it's stuff you can look up fairly easily in an encyclopedia or online, and is pretty easy to translate - you don't need more than a cursory understanding (otherwise, you're telling me you're a geology expert now too?). There's no real nuance of language there, which is where translation really gets challenging. As for the online translators, those things are terrible - you can give them pretty simple sentences and come out with atrocities. Anyway, this is a silly argument - you obviously are good at what you do, and it's great you speak Spanish; I don't know why ba294 brought it up, but the 12-year-PhD thing was a bit much.

bravo bjw2103.

The reason why I brought it up was because,
I'd rather take Finance/taxes/real estate advice from a Finance/MBA grads.
Almost 200 replies of arguing with someone in Spanish degree (and refuse to admit he's wrong) is just silly.