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Advantage of Home Ownership?


Guest BadAccountant
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Guest BadAccountant

I have seen a lot on this site about the advantages of home ownership. And because I have a little bit of knowledge in this area I would like to discuss one in particular.

Mortgage Interest Deduction

Let me set the stage...

If a married couple is purchasing a home and they are feeling like the mortgage interest deduction will save them on their taxes, I would have them do some simple calculations to see if it would actually help. One thing that is driving this is the new standard deduction for a married couple is $10,700.

So lets say Mr. and Mrs. Smith buy the house in June. On a $175K, 6.5%, 30 year fixed loan the amount of interest (assuming a one percent origination fee) would be about $7,450 for the year. Although in the subsequent five years it is about $11,000 per year. So now, in your first year, their is no advantage (if you buy in say the last half to last 3/4 of the year). And the advantage in laters years would be about $300 in mortgage interest deduction above your standard deductions.

Now I understand that their are other deductions on your Schedule A (Itemized Dedcution) than just mortgage interest, but in the first year (assuming above) you are not even able to unlock them. In years after you have to look at a couple of things.

You will pay more to have your return prepared. How much depends, but at only a three hundred dollar difference in deduction (300*your tax rate=savings, i.e. 300*20%=$60) it may be a complete wash.

If you are happen to have medical bills that are significant then you also be able to deduct more (subject to a 2% of AGI hurdle). Again applying the math of amount * tax rate = Savings it may be a negligable gain.

I am bring this up mostly to new home owners that typically are buying less expensive homes. As the above situation changes (i.e. your paying much more interest on your home initially, you purchase at the beginning of the year, you have significant schedule A deductions, or a combination of all) then you have to weigh where you are at.

And as many have said on this site, there are many more advantages to home ownership, I just wanted to through a word of caution to the uninformed.

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Guest BadAccountant

Really the post was for those people more in the entry level market. Not everyone can swing payments with interest more than that to start. And I think it is important that people without a lot of other deductions don't start to count on that aspect of homeownership as a true benefit within the first or even subsequent years. Coming from seeing people disappointed that their mortgage interest deduction netted out 30 bucks on the return.

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I was miserable in the last place we rented because the master bedroom was harvest gold (the color of many a bad 1970s appliance) and we couldn't paint it unless we repainted it (and we didn't paint before we moved the stuff in, so it never got done).

I'm so glad not to have that color in my bedroom any more!

Easily worth the hassle of property tax. :)

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If you are happen to have medical bills that are significant then you also be able to deduct more (subject to a 2% of AGI hurdle).

I'm pretty sure the medical bills are subject to the 7.5%+ rule, not the 2% rule. You can only deduct medical expenses beyond 7.5% of your AGI. So, if your AGI is $50K, you can only deduct medical expenses AFTER your have spent $3750.

One nice thing about the IRS's rules with medical bills is that it doesn't matter when the services were performed/received. It only matters when they are paid.

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Guest BadAccountant

You are correct about the 7.5%, I had a bit of a brain fart as I was thinking about the medical hurdle, but I quoted the miscellaneous deduction hurdle, oops. And even at that your state (as AZ does) may deduct the full amount of medical expenses instead of the Fed amount.

And as a most individuals are cash basis taxpayers, you are correct about the paid date. I am saving up paying some bills for just that reason.

And I reiterate, the intangilbles (IMHO) are worth the 'cost' of homeownership. People should just be informed of the realities and this seems like the perfect forum.

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