By Cheri Mersey
As is the case with most Americans living in Singapore, my husband and I rent our apartment. For the past 7 years this has worked out well for us as the majority of our housing costs are deductible in our U.S. tax return. Therefore, we have never felt as if we were “throwing away” our dollars on rent money (as we did when we were renting in New York City!).
Recently, though, the Senate passed the “Jumpstart Our Business Strength (JOBS) Act” which would, if enacted, effectively eliminate the housing exclusion. This begs the question: “If we’re not going to get a deduction for the rent that we pay, and we’re not planning to leave Singapore anytime soon, should we buy instead?”
In order to reach a sound decision I began by “running the numbers” using the case of actual clients as a jumping off point.
The clients’ current situation is as follows:
- Married couple with one child
- Apartment rent of S$3,800 per month (approx. US$2,235 using an exchange rate of 1.7 which rate I will consistently use throughout this article)
- Value of apartment S$1,200,000 (approx. US$706,000)
- Income for 2003 (from salaries, interest, dividends, etc.) of approx. US$190,000
The first step in the analysis was to see what would happen to the couple’s taxes should the housing exclusion be eliminated and if they chose to continue to rent their apartment. The conclusion in this scenario was that their taxes would rise by about US$300.
The next step was to see how their taxes would be impacted if instead they bought their current apartment by putting down 1/3 (US$235,000) and financing the rest (US$471,000) over 30 years at an interest rate of 4% (I used a fixed rate of 4% for all 30 years however, in reality, the rate will fluctuate). Although I realize that a down payment of 1/3 is quite high, it had to be used in order to keep the monthly mortgage payment as close to the current monthly rental payment as possible assuming that this was the amount which the couple was comfortable paying on a monthly basis for housing. As the couple would be able to deduct the home mortgage interest that they pay, the conclusion in this scenario was that their taxes would be about $500 lower than if they were renting and obtaining the housing exclusion.
Put in more concrete terms, if the couple was renting and taking the housing exclusion their tax would be $2,300 whereas it would be $1,800 if they owned their apartment and took a mortgage interest deduction instead.
For taxpayers with higher income and rent, and with abodes of greater value, the tax differential would be larger (for instance in one practice case I found that the tax was $33,000 with the housing exclusion alone, $37,000 without any housing exclusion or mortgage interest deduction and $32,000 with a mortgage interest deduction alone).
Consequently if taxes were the only consideration then (in a world where there was no housing exclusion) buying would result in less tax than renting. However, there are other very important factors that will certainly influence your decision and require serious consideration. Some of these factors are as follows:
- The impact of tying up the down payment in Singapore property (versus property in another country or other potential investments such as stock) and what the exchange rate is at the time of purchase;
- Whether the value of the property will increase from the time you buy it until the time you sell it;
- How easily you will be able to sell the property when the time comes (and what the exchange rate will be);
- Whether you would be willing to rent the property should you be unable to sell it and what the property market is like for similar rentals;
- The direction that interest rates will take in the coming years.
Given that each person’s/family’s situation is unique, the decision of whether to buy or rent can be determined only on an individual basis. In writing this article my objective is to demonstrate that although losing the housing exclusion would have a tax impact on many of us, this impact would, in most cases, not be significant and thus it should not be a primary and/or motivating factor in the decision of whether to buy or rent while living in Singapore.