“the tax write off we won’t qualify for due to renting”
If you aren’t already itemizing your tax return (filing Schedule A with your 1040) you actually LOSE tax write offs when you write off your mortgage interest
A single person gets the $5000 personal deduction ($10K for couples) just for being an American taxpayer
When you file Schedule A to claim mortgage interest as a writeoff you give up this $5K ($10K) personal deduction
In essence, the first $5K ($10K) of mortgage interest being written off is a wash – there is NO tax savings for this chunk of mortgage interest
Let’s look at an example:
$200K mortgage at 6% interest means we will pay $12K in interest each year
most people, when calculating ‘tax savings’ use this entire $12K to compute their savings while overlooking the fact that they gave up $5K ($10K) in writeoffs in order to take the $12K
so, a more accurate estimate of the tax savings is to subtract the $5K ($10K) personal deduction from the total interest paid and THEN compute your tax savings
that gives us $7K ($2K) to writeoff – at 30% tax rate that means we’ll save $2100 ($600) on our taxes – that’s $175/mo ($50/mo) savings
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my example is based on the premise that you aren’t already itemizing your taxes BEFORE you buy real estate – if you are filing Schedule A for reasons other than mortgage interest deductions then this example doesn’t apply to you because you have already given up your personal deduction
I have several thoughts about using expected tax savings as a justification for purchasing real estate:
– don’t
– most people over-estimate the amount of savings
– if you can’t afford the property without the expected tax savings you can’t afford the property
