U.S. Tax Implications of Owning Versus Renting in Singapore
By Cheri Mersey

Back in October 2004 I published an article in the SAN that examined which was more tax beneficial: to rent or to purchase a home in Singapore.

At that time the Senate had just passed a tax bill which included a measure eliminating the housing exclusion (fortunately this measure was stricken from the final bill) and the conclusion reached in the article was that, while there would be some tax impact to losing the housing exclusion, the impact would not have been significant and, thus, should not have been a primary and/or motivating factor in the decision of whether to buy or rent while living in Singapore.

However, with the enactment of TIPRA (Tax Increase Prevention and Reconciliation Act of 2005) in May 2006 (which harkened in a reduced housing exclusion for expatriates globally as well as instituting a “tax stacking” method for calculating the tax), I thought that now would be a good time to revisit this analysis.

As I did for the first article, 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' situation is as follows:

The first step in the analysis was to see what the couple's taxes would be if they chose to continue to rent their apartment and the conclusion, in this scenario, was that their U.S. taxes would be about US$700.

The next step was to see how their taxes would be impacted if, instead, they were to buy their current apartment by putting down 30% (US$300,000) and financing the rest (US$700,000) 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 would fluctuate).

Although I realize that a down payment of 30% is quite high, it had to be used in order to keep the monthly mortgage payment as close to the 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 U.S. taxes would be zero.

Not a big tax break, I think you would agree!

For taxpayers with higher income who are paying more rent and staying in abodes of greater value, however, the tax differential can be quite large (for instance in one practice case, at a remuneration level of US$250,000, I found that the U.S. tax was $15,000 if the couple continued to rent versus $7,000 if they decided to buy).

Consequently if taxes were the only consideration, then in a world with a reduced housing exclusion and a tax stacking provision, 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:

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 was to demonstrate that, although the housing exclusion has been reduced and a tax stacking provision imposed, the tax impact of renting versus buying only becomes significant at higher levels of income and, thus, should not be a primary and/or motivating factor in the decision of whether to buy or rent while living in Singapore unless this is the case.

Other ways of minimizing the U.S. tax burden (in the current tax environment) would be to maximize 401(k) or IRA contributions, consider whether converting to a tax equalization arrangement (if this is available) would be more beneficial or asking your employer for assistance to pay the additional taxes due.

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