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Help A Reader: Buy a House to Prevent Uncle Sam?

by J. Money on Monday, June 17, 2013

uncle sam poster

Got an interesting email over the weekend, and thought you’d enjoy reading and chiming in :) Can’t say I’ve heard of this one as a driving force to go out and buy a house! Haha… Though bonus points for the creativity.

Here’s what our dear reader sent over:

Hi J$!

My husband has recently secured a nice, but temporary for now, gig that will bring us about $60,000 gross by the end of the year. He’s 1099, so there are no taxes taken out of his paychecks. He has been tossing around the idea of buying a house to prevent the tax man from taking as big of a chunk at the end of the year. (Reminded me of the way you bought a house on a whim.) Although he is freelance, his pay has been relatively steady for the past few years.

What do you think about this? Who should I ask for more detail? Is this a terrible idea? Please help, I’m scurred!

Thanks!

This is what I wrote back:

Hey! That move reminds ME of our house-on-a-whim buying experience too ;) Which as you know I would take back in a heart beat if I could! (As long as I could keep everything I learned and how it changes my life for the better, haha…. but that wasn’t cuz of the house purchase itself, more on what it *led* to. Like the starting of this blog :))

My gut feeling from your husband’s idea is “ACK!” When you buy a house you usually want to do it for a number of other reasons than just taxes :) Like, settling down in one place for a while, building equity instead of paying rent, needing more room for a family, etc etc…. Now if some of those reasons ALSO play a part in his plans, then yeah – totally different story. Especially if it’s longer term than just 1 year because when you buy a house they’ll be checking in on all this and verifying income in past, present, and future, along with a number of other things like your credit and debts/savings/etc.

There’s a lot more to the home buying process that people tend to think, so I’d be careful going down that route unless again you guys have been wanting to for a while outside of just taxes. It’s also hard to gauge your situation without knowing the entire financial picture as well ;) If you have no emergency funds or income outside of the $60k that would also throw up some flags to hit the brakes.

Now all that aside, there ARE some other ways to shelter some of that tax money for sure. My favorites being to plunk down $5,500 to max out a Roth IRA for *each* of you (so, a total of $11,000 invested for the 2013 year, and maybe even another $11,000 for the 2014 year since the gig will pay into next year too?), and then the other being to pump up your 401(k) contributions if either of you have that option. All that money in either of those accounts will grow tax free until you’re old and gray and needing to take it out :) (UPDATE: I’d also look into an SEP Ira as well, as a commenter pointed out below. I totally forgot about that and I use one myself as someone who’s self-employed! D’uh.)

Another option could be to finally start that small business idea one of you have always wanted to do, since you can write off a lot of those expenses, but that may even be more hardcore than buying a house to not pay taxes, haha… Especially if you’ve never ran/owned a small biz before.

Regarding “who to ask” for more details: If you’re interested in checking out the home buying process more and what that all entails, I’d check with a local realtor. Especially if your family or friends know of someone they like and trust as they’ll be able to tell you all about the ins and the outs with ownership (and hopefully not skew you one way or the other, so def. try to get a recommendation!).

On the subject of not paying as much taxes, I’d have a chat with a financial adviser or a CPA. Both of those could shed more light on that type of stuff – and again good to get through a friend or family member that trusts them.

Hope this helps!

What do you guys think? Any gut feelings one way or the other? Anything I left out? All I know is I’m damn glad I got all this craziness out of my system years ago so I don’t have to go through it all again :) Home ownership is no joke, you really gotta think hard before jumping in!

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[Photo by karendesuyo]


{ 25 comments… read them below or add one }

1 Free Money Minute June 17, 2013 at 6:21 am

Simply to avoid taxes would be the wrong move. Many people keep their mortgage around simply to write the interest off and avoid taxes. This is a real dumb move as you are sending the bank interest only to prevent sending the government maybe 25% (if you are in this bracket) of that interest to the government. Better to just pay off the mortgage if you can.

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2 Aimee June 17, 2013 at 6:45 am

YIKES!!! You need to speak to a tax advisor, not a blog, before making what you think is a tax move. Buying a house will not prevent taxes. You will likely not pay $60k in mortgage interest and real estate taxes by the end of the year to offset the income. It would take a HUGE mortgage to pay that much interest, and when you get into HUGE mortgages there are also limitations. There is also self-employment tax that can’t be avoided except by reducing the self-employment income by related expenses (like if he has to buy supplies, travel, etc.) As a tax preparer and accountant who is in the process of applying for CPA certification I BEG you to talk to a CPA in your state about the tax implications of making the money, and reasonable ways to reduce your taxable income. Talking to a professional will cost you money (probably a couple hundred), but making an uneducated “tax move” with $60k will likely cost you much more (thousands!!!). Good luck!!

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3 J. Money June 17, 2013 at 10:56 am

Agreed! A professional could give much better advice and info, especially after knowing the entire picture they’re working with.

Good luck w/ the CPA cert, Aimee! Sounds awesome!

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4 Debt Blag June 17, 2013 at 7:44 am

While there aren’t enough details here to know everything that’s going through their minds — biggest question of all is whether they would have bought a home anyway — this seems like cutting off your nose to spite your face.

And yes, a question of this magnitude really does deserve the attention of a tax professional

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5 Lance @ Money Life and More June 17, 2013 at 7:45 am

I doubt you’ll avoid many taxes by buying a house. There aren’t many (if any) up front write offs you’ll qualify for. Unless the house is pretty expensive, the interest you pay probably won’t exceed your standard deduction either, so the phantom mortgage interest tax deduction won’t help much either.

Of course, if you’re buying a rental property, things can change a bit.

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6 Brian June 17, 2013 at 8:23 am

That’s what I was thinking. I couldn’t think of any intial write offs to avoid taxes right away.

The suggestion to put money in an IRA is the best one (if you are looking for an upfront tax break than a traditional would be the way to go).

You are pretty much going to be paying taxes no matter what you do, and buying an asset such as a house to avoid them is probably not the best plan, unless of course you were going to buy a house anyways.

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7 Debt Blag June 17, 2013 at 3:30 pm

Yeah, that’s where it gets more interesting. Because then, you throw in depreciation expense…

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8 Greg@ClubThrifty June 17, 2013 at 7:50 am

Eeeeek! Bad idea for so many reasons. His job is temporary, so what are you going to do after that? How will you pay for it? The tax write-off isn’t may not even be bigger than your standard dediction. What if you have to move for his next job? Etc., etc., etc.

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9 MrsPoP @ PlantingOurPennies June 17, 2013 at 11:06 am

This was exactly what I was thinking. You’re likely to not see many immediate benefits, but add a lot of stress to your lives…

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10 Immy@ FinanceRomance June 17, 2013 at 8:51 am

You need to think in the long term and not just how you will get by for now. With his job only being temporary its taking a massive gamble that he will possibly be offered a job after the short term contract has finished. It seems a bad idea if you’re only doing it for tax reasons…

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11 Tiffany @ Extraordinary Reasons June 17, 2013 at 9:33 am

I would have to agree with most of the other responses here so far. Buying a house can be an extremely rewarding experience, but there’s a whole lot more that should go into it besides just being a tax write-off. If you were already planning on buying a house and the job is just accelerating the process that’s one thing, however that doesn’t seem to be the case. Home ownership is not something to be entered into willy-nilly. If you were to buy a house, would you live in it? Rent it out?

J’s advice about maxing out your retirement accounts should be a given. It’s tough to give advice without knowing the whole financial situation but either way, this should be step numero uno!

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12 Michelle June 17, 2013 at 9:43 am

I don’t think I would buy a house just to avoid houses. It needs to be a well-thought out decision.

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13 Derek June 17, 2013 at 9:54 am

I think the best advice possible was missed in the article. The best way to reduce taxes for a 1099 employee and grow for the future is a SEP-IRA. Since the 60k gross will be coming in through 1099, can shift a portion of this income to a SEP-IRA to avoid taxes. SEP-IRA would be a better vehicle to avoid taxes rather than purchasing a house.

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14 J. Money June 17, 2013 at 10:58 am

YES!!! Man, can’t believe I missed that one – especially since I currently contribute to an SEP too! Jeez…. good catch. Going now to update the article ;)

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15 Holly June 17, 2013 at 9:55 am

Talk to several CPAs preferably smaller firm vs bigger firm. If you prepare your own taxes now… you will definitely want to use a CPA for this year. It is amazing what a good CPA can do to your taxes!!

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16 J. Money June 17, 2013 at 10:59 am

Agreed! My CPA saves me tons of money every year, not to mention all the advice she’s given every time my life changes (which, at this rate, is like twice a year!). Well worth the money.

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17 renae June 17, 2013 at 10:16 am

I agree with others who have commented that the mortgage interest deduction will not help that much with taxes, especially in the first year when you only have a partial year of mortgage payments.

Also, Roth IRA contributions will not shelter any income from taxes in the current year. You’ll have to use a traditional IRA for that.

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18 Sarah June 17, 2013 at 10:36 am

I agree: ACK!

Buying a home for the tax write-off is a very bad idea. Sure, it might save them a bit of money on their taxes (assuming they itemize enough to exceed the standard deduction)… but any tax benefits they do get would be more than cancelled out by the down payment, closing costs, maintenance, moving costs, etc.

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19 Jake @ Common Cents Wealth June 17, 2013 at 10:57 am

I completely agree with your advice, J Money. I would not buy a house just to save on taxes. If you really want tax breaks, contribute to a 401k. This will give you a tax break and save for retirement. Now if you were going to buy a house anyways, now is a great time and you’d get the tax benefits so I’d say go for it. I wouldn’t do it just for the taxes though.

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20 Shafi June 17, 2013 at 11:06 am

Many have said the same thing. Buying a house for the sake of interest deduction is not a good idea. In 2012, we paid $13,000 in mortgage interest, the government subsidized it with close to $3,000. The $10,000 difference is huge sum to put into some kind of other investments rather than buy a house. Plus the property tax plus the utilities, we paid more than $30,000 last year and for what? We know that most people use three rooms – bedroom, kitchen, and living room. For two people, that pretty much covers.

Find another reason to buy a house, not just simply interest deduction.

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21 Rob Wright June 17, 2013 at 11:24 am

I agree with most commenters here. It’s a bad idea to pay mortgage interest just to reduce your taxes. You are only getting benefit of the tax effect of the mortgage interest deduction. It you just want a deduction – donate to a charity. Same affect to your taxes.

Also, the Roth IRA is a great idea, but will not shelter current year taxes since there is not a current tax deduction for the contributions. A SEP IRA would be best.

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22 Wunderwriter June 17, 2013 at 12:34 pm

Insanity comes to mind. Buying a home is an experience fraught with issues, emotional and financial. A difficult and expensive proposition at best, and during a mini “bubble” such as we’re experiencing now (as the result of artificially low interest rates), the market is full of investors attempting to cash in. If you don’t have a very, very good reason to throw yourself at the mercy of the system, why do it? He’s already a 1099, take out a business license and become self employed. Write off expenses, take the maximum for a self directed retirement account (there are many, many options here and I’m no expert), and KEEP RENTING!

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23 J. Money June 21, 2013 at 10:50 am

Great advice :)

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24 Mike@WeOnlyDoThisOnce June 17, 2013 at 1:56 pm

I’m also in favor of utilizing other tax shelter options and saving the purchase of a home for when it is truly a sincere decision.

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25 Kyle @ Debt Free Diaries June 17, 2013 at 3:30 pm

Instead of buying a home, have you thought of purchasing a rental property instead? I believe (and I could be wrong, so check with a professional) that down payments on a rental home can be written off at least partially.

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