Property Tax Deduction Big in California

The California Association of Realtors says that building up equity is only one way homeowners can build up wealth as a result of their investment.

True, in a state like California, where the median home price has increased at an average 20% annual rate over the past five years, equity appreciation is a big component of the investment value associated with residential housing. Nationwide, home values appreciated at a 7% annual rate between February 2000 and February of this year.

But homeowners also reap big tax savings, CAR noted. That's especially true in states with high property tax rates. According to a CAR briefing paper, the purchase of a single-family home in California at the current median price of $471,620 would generate a property tax deduction of about $4,700 each hear - or about 1% of the property value.

The CAR analysis assumes that the property taxes are about 1% annually of the property's value.

In addition, over a 12-month period, mortgage interest paid would total $26,750, assuming a 20% downpayment and a mortgage interest rate of 5.71%. Together, the mortgage interest deduction and the property tax deduction total $31,460 in this median home price, 80% loan-to-value ratio example, CAR said.

That translates into a total tax savings for homeowners in the 25% tax bracket of approximately $8,000 for the first year of homeownership. About 18% of that total tax savings can be attributed to the property tax component of the deduction.

CAR noted that homeowners can maximize their tax savings by rolling other types of consumer debt, such as home-equity loans, into a home-equity loan or a refinanced first mortgage. Interest on home-equity debt is deductible, and home loan interest rates are typically lower than credit-card rates, CAR noted.

A national tax reform debate has housing industry advocates scrambling to protect the tax deduction for property taxes and mortgage interest. While details of the Bush administration's anticipated proposal to revamp the tax code remain unknown, it is expected that the commission currently examining tax policy will consider putting all deductions "on the table."

In the past, President Bush has expressed support for the mortgage interest deduction. However, some influential Republicans have called for ending the deductibility of state and local taxes.

SNAPSHOT: California Homeowners Benefit From Property Tax Deduction

Feb. '05 Median Home Price $471,620

Est. Property Tax Annual Bill $4,700

Est. MI Eligible for Deduction $26,750

Total Homeowner Deduction $31,460

Estimated Tax Savings $8,000

Source: CAR

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