Buy a Home vs Rent
With many real estate people, all they ever tell you is “Buy a home!” In many cases, this is good advice, but it may surprise you why!
The other day, a young first time home buyer told me he couldn’t understand why he would pay hundreds of dollars more in house payments to buy the same home he is renting now.
It is true that his monthly house payment would be substantially more than his current rent, but he is forgetting one of the biggest short term benefits of of owning his home instead of renting - the mortgage interest tax deduction from his taxable income which lowers his total income tax owed to the IRS!
If the mortgage interest he would pay on this loan is about $1600 per month – typical for a home loan on a $430,000 purchase – this can be added to his property taxes and deducted from his taxable income, reducing his income tax bill.
That could be about $2000 worth of tax deduction every month he has his mortgage!
If he is in the 28% tax bracket for Federal Income Tax and approximately 9% for California Income Tax, this means over one-third of this amount would be returned to him in the form of income tax savings.
That would make his net monthly outlay about the same as he is currently paying in rent!
But that is not all. By using this income tax deduction, he may also be able to itemize other deductions, further reducing the amount he owes for income tax.
And he is able to deduct some of the costs of purchasing that home – loan origination fees and discount points – in the year he buys his home, too.
Before you apply this strategy to your own personal situation, you should always consult an income tax professional. The IRS and the California Franchise Tax Board have very strict rules about what can and cannot be deducted, and you need to examine the entire picture before making this very important decision to buy instead of rent.
Read about the Mortgage Interest Deduction and other mortgage related topics on the IRS website
Read about how the State of California treats the Mortgage Interest Deduction on the California Franchise Tax Board website.
However, when you consider the fact that owning your home allows you to take advantage of future home price appreciation and insulates you from rent increases, today’s lower home prices and traditionally low interest rates may provide the perfect environment to make the place you call home actually your own home!
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