Q. I am a 78-year-old widow and would like your opinion on what makes sense when it comes to car buying? I have always paid cash. But a number of my friends lease and replace cars every two or three years. My husband always said leasing only made sense if you could write off the lease as a business expense. Is that still true? My 11-year old Camry has 85,000 miles and is due for replacement. —A.S., by email
A. Leasing is seldom a reasonable option for a simple reason: It locks you into paying the highest cost of driving a car, depreciation, in the years that the depreciation is greatest. The only exception to this is that there are times when car manufacturers offer very cheap leases to reduce inventory. The manufacturers, not you, then suffer losses at the end of the lease.
Most of the time, however, you are paying for all that first-, second-, and third-year depreciation. Leasing does make a business deduction less complicated, but some accountants now say that just taking a deduction for mileage is good.
But let’s assume that at 78 you are still working and hoping for tax deductions. The reality, then, is that we can, and do, own cars for longer today. We do this because cars have improved. My bet is that your Camry has many miles left in it. Many people drive their Toyotas for 150,000, 175,000 and even 200,000 miles. Just take good care of it and keep it garaged.
Q. I will be 65 this year. My husband is 61. When we relocated to Texas we sold our house in Ohio and paid off a lot of bills. Since we have little saved for retirement, we will be working until we drop.
Does it make sense for us to buy a house at this time in life? I see the benefit as having a locked in monthly payment whereas in a rental the payments will continue to go up. The disadvantage is paying for maintenance on a home. What are your thoughts? —G.E., San Antonio, TX
A. Just about everyone loves home ownership, but it can be an unhappy, unrequited love. You may do a lot more for your house than it does for you. So lets consider how each choice might work for you.
One of the reasons people buy a single-family home is that they want space to raise children. As a result, single-family homes tend to be larger than apartments and condos. So it’s likely, as empty nesters, that you’ll buy more square feet of house than you need. And pay accordingly.
A rental, on the other hand is likely to be “right-sized” for an empty nest couple and the monthly rent will be materially lower than the cost of the house you would likely buy. You’ll have to take a sharp pencil to figure out the actual difference, but it is likely to be significant.
Home ownership, of course, brings tax deductions.
But the reality in today’s market is you have to buy a very expensive house to benefit from those deductions. That’s great for San Francisco and San Diego. But San Antonio, not so much. Let me give you an example.
According to the National Association of Realtors, the median sales price for an existing home in San Antonio in the fourth quarter of last year was $185,500. Assume a 20 percent down payment and you’ll have a mortgage of about $150,000. If your mortgage rate is 4 percent, you’ll pay about $6,000 in interest in the first year. Taxes on the same house are likely to be about $3,700 because Texas depends heavily on the real estate tax. Total: $9,700.
For 2015 the standard deduction for a joint return is $12,600. So you’d need $2,900 from other itemized deductions before you’d enjoy any tax benefit from home ownership. This is how it plays out in most of the country, for most people. What do I mean by “most people”? That would be the 80 percent of all households with income under $100,000.
So, what’s the alternative? Build you savings. Pay rent. Maximize what goes into a 401(k) plan if one is available. Build additional savings in a taxable account, if possible.