Explaining Tax Benefits of Home Ownership

photo courtesy of www.zillow.com



April 15th is slowly approaching so I think it is appropriate to write about the tax benefits of home ownership. I am a Realtor and not a CPA therefore you should consult with a CPA before purchasing a home because of the tax benefit of home ownership.  I should also warn you that if numbers make you nauseous, do not read any further. Now the benefits I am about to explain only apply to homes purchased with a mortgage and would not benefit those paying cash.  First of all, if you own a home with a home mortgage under $1,000,000 100% of the interest and property tax are deductible from your income tax.  For the first 12 years that you own your home 77% of your principal and interest payment of your home is interest.  Also, if you purchased a home and made less than a 20% down payment you may have mortgage insurance that you are required to pay.  Some of that mortgage insurance is tax deductible as well.  These rules apply for your personal residence.  There are also tax benefits of owning investment property but for this article I am going to concentrate on how tax benefits apply to your personal residence.

Let's say you purchased a $210,000 home and made a down payment of 5% meaning you have a mortgage of $200,000.  Lets also say that your interest rate is 5% and this is a 30 year loan.  In this scenario your principle and interest payment would be $1,073.64 per month.  Included in your monthly payment are also property taxes, homeowners insurance, and mortgage insurance.  In Fayetteville a home with a tax value of $210,000 would require $2,016.66 a year in taxes or $168.05 per month.  Let's estimate $75 a month for homeowners insurance and $140 per month for mortgage insurance.  This would bring your total monthly payment to $1,456.69 and mean you are paying $17,480.28 per year.

Total Monthly Payment for a $200,000 mortgage (estimate)

                                           

                                            Principle and Interest Payment=     $1,073.64
                                            Property Tax=                               $   168.05
                                            Mortgage Insurance=                     $   140.00
                                            Homeowners Insurance=                $     75.00
                                            Total=                                           $1,456.69

Now lets talk about what is deductible.  For the first year that you own this home $9,932.99 of your yearly mortgage is interest.  This number will change every year and if you want an accurate assessment of your mortgage you should view an amortization table.  Your property taxes that you have paid for the year in the amount of $2,016.66 are deductible as well as part of your mortgage insurance.  For this example I am estimating that $600 of your mortgage insurance is deductible.  This gives you $12,549.65 that you can deduct from your income on your taxes.

Total Tax Deductions for this example

                                            Interest=                                      $9,932.99

                                           Property Tax=                              $2,016.66

                                           Reportable Mortgage Insurance=  $  600.00

                                           Total=                                          $12,549.65

What does this mean as far as real money?  Let's say you are in the 30% tax bracket and you do not owe any taxes at tax time.  This means that because you are a homeowner you would receive a check from Uncle Sam for $3,764.90 ($12,549.65 x 30%) .  This breaks down to a savings of $313.74 per month meaning that monthly payment of $1,456.69 is only costing you  $1,142.95.  This beats renting doesn't it!