Home Ownership: Rent Versus Own

Your tax clients Jack and Diane, a married couple filing a joint return, fell in love with a new construction house for sale in their small Illinois hometown. The builder offers two options on the home: purchase with $20\%$down or rent the home.

Assume the following facts and projections when considering the analysis:

$-$Jack and Diane both have steady jobs with a current AGI of $$120,000.$

$-$They anticipate annual AGI growth of $3\%.$

$-$The home has a purchase price of $$200,000$and is located in an area with an expected annual property value growth rate of $5\%.$

$-$If Jack and Diane purchase the home, they will put $20\%$down and finance the remainder on a$30$year mortgage at $5\mathrm{.}25\%.$

$-$Annual property taxes on the home are $2\mathrm{.}6\%$of the home's value.

$-$If Jack and Diane rent the home, they will invest what would have been their

$20\%$down payment into municipal bonds paying an annual interest rate of $4\%.$

$-$The home rents for $1\%$of the assessed property value per month.

Jack and Diane will use the home as their principal residence for all

$10$years$.$

$-$Regardless of their decision, Jack and Diane intend to contribute $10\%$of their AGI each year to their favorite qualified charitable organizations.

$-$Jack and Diane intend to move out of the area $($but in the same State$)$in $10$years to support their parents in retirement. Their parents live in an area with substantially similar home costs.

$-$Jack and Diane live in a State which imposes a tax on Federal AGI at

$4\mathrm{.}95\%.$

The model uses $2022$income tax brackets and assumes the inflation adjustments to tax brackets and standard deduction continue as trended from

$2020$to $2023.$bThe model assumes current TCJA provisions will be extended beyond their current expiration of $2025.$

Required:

a$.$ What is the effective tax rate in year $9$ if Jack and Diane rent; own?

b$.$ What is the projected property tax on the home in Year $1?$

c$.$ What is the state tax deduction for year $4$ if Jack and Diane own?

d$.$ How much mortgage interest is paid by Jack and Diane over the $10$ year period?