The Tax Implications of Buying Your Home

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As you’ve figured out, owning a home is an expensive proposition. Lucky for us, though, there’s a silver lining to our little black cloud. What is it? Elementary, my dear Watson! (Or, as John Lennon once said, “Ellafitzgerald, my deaf whopper!”) It isn’t a Sherlock Holmesian deduction. It’s a tax deduction. And it’s major.

When you file your federal and state income tax forms, you’ll be able to deduct mortgage interest and property taxes (assuming that your loan is for $1 million or less). And there’s even a deduction for up to $100,000 for a home equity loan.

So how much is this really going to save you? Well, let’s hop on over to our Foolish calculator to find out. It works like this: Let’s say that you’re in the 28% tax bracket. Let’s also say that, once you get your loan, you end up paying $1,000 a month. The interest portion of that $1,000 is tax-deductible — and, in the early years of repaying the loan, almost all of it is interest. This means (assuming that you have other deductions at least equal to the standard deduction) that it will lower the amount of money on which you pay taxes. And this, of course, means that your tax bill will be significantly lower — so you’ll effectively end up having paid something like $720 a month for that loan. ($1,000 minus 28%, or $280.)

This is not to say that the reason to buy a house is to save taxes, but it sure is a nice perk. And the place you live will belong to you, not some landlord who doesn’t know your name, won’t fix plumbing problems, doesn’t like you knocking holes in the wa ll to hang paintings, and threatens to call the police when you try to sneak a waterbed up the back stairway.

One caveat — be sure to check with your accountant to make sure that you’re going to be able to get the tax savings you expect. The likelihood is that you will, but you don’t want to count on this kind of savings and then discover that for some reason you’ve miscalculated.

So go ahead, slosh away. If the waterbed springs a leak, it’s your problem. Welcome to the joys of home ownership!

But wait. You haven’t actually bought the place yet. You’ve just investigated the ins and outs of loans. (You’re well ahead of many home shoppers, who hop in the car one day and begin to look, without investigating how they’re going to pay for this humong ous asset.) Now you need to think about the house itself, and the neighborhood.

Article by Fool.com

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