Invest Your Rent
Posted in The only one who benefits from a rent check is the landlord. Renters never see that money again, while homeowners usually profit when they sell. In addition, renters can’t use any of their rent payment as a tax deduction, like homeowners can. If you or someone you know is renting, it’s time to put that rent check to better use!
The mortgage-interest deduction is probably the best financial argument for buying rather than renting. Consider this example:
If you can afford a mortgage payment of $1,000 (principal and interest only), you can buy a house for $151,426 if you put 10% down on a 30-year mortgage at 8% interest. If your payments started in January, you would pay $10,862 in interest for the first year in the home. That entire amount is deductible on your federal income tax return! Assuming you are in the 27.5% tax bracket, you would save $2,989 in taxes, or $249 per month. So your $1,000 payment is really only $751 when you factor in the homeowner’s tax advantage.
NoVa Sideliner said,
January 21, 2007 @ 9:36 pm
Whoa Nellie! There’s a thing be caustious about:
you would pay $10,862 in interest for the first year in the home. That entire amount is deductible on your federal income tax return!
That’s not always true. And probably NOT true for most people in Chattanooga. If your state and local taxes and other deductible items don’t make it up to the standard deduction (which is $10,700 in 2007 for a married couple), then you won’t get *any* benefit! And if you’re in a no-income-tax state like Tennessee, you’ll have to rely on the sales tax deduction (instead of income tax deduction), which is pretty miserly.
A rough guess for sales tax might be $1,000 deduction. That’s it. Add in property taxes. Then add in your mortgage interest. Now compare that total to the $10,700 standard deduction. You only get a tax advantage if you beat that $10,700. So sure, the $10,862 mentioned in the main posting is deductible, but you might only be deducting, in the end, a couple of thousand more than you would by renting! Here’s a VERY rough example:
Sales tax deduction $1,000
Property Tax $2,000
Mortgage interest $10,862
gives total of $13862 in deductions
This would be $3162 higher than your standard deduction, so you save… $869.55 in US income tax. That’s about $72/month — versus not buying and using the standard deduction that you get anyway.
Check it out with your tax professional if you don’t believe it, but this marketing spin about the mortgage interest deduction saving you so much on taxes is really only valid in high-income-tax-states; it is painfully inaccurate and troublesome to push this in low tax states like Tennessee, especially for people buying modest houses. Ask some of my Texas friends who were rudely surprised at how little they saved after buying!