Inflation, Taxes, Cap Rate: Basic Concepts Homeowners Should Keep in Mind

• September 13th 2010

by Mark Wellborn

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The Washington Post had an excellent article in this past Saturday’s edition that discusses some economic concepts that should be kept in mind when considering a home purchase.

The piece was written by Neil Irwin who covers the national economy and Federal Reserve for The Post, and also purchased a condo in Logan Circle back in 2008.

If you are considering a home purchase, the article is the closest thing we have seen to required reading in awhile (next to UrbanTurf). It can be read in its entirety here, but below are a few highlights:

• Inflation — Irwin writes that rising inflation is the home buyer’s “friend.” His reasoning is that historically home prices rise only slightly faster than inflation, and therefore “the rate of inflation plays a major role in determining the value of your home when you go to sell, even as the amount you owe on the mortgage is fixed.”

• Taxes — It is fairly well known that home owners can benefit from a variety of tax deductions. However, Irwin writes that the uncertainty of what the tax code will look like after tax cuts expire at the beginning of next year makes it difficult for those considering a home purchase to plan for what their tax benefits will be 5-10 years out. Irwin recommends using a program like TurboTax that can help calculate federal and state income tax liability based on mortgage interest and property tax.

• Cap Rate — Irwin explains the role of capitalization rates in a home purchase and how they can be used to compare homes from an investment perspective. This was the most interesting part of the article in our humble opinion, but too complex to outline in detail in this post. Cap rates are a common benchmark used in the commercial real estate world, and the rule of thumb is the higher the cap rate the better.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/inflation_taxes_cap_rate/2466.