Tax Tips For Home Buyers

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Taxes play a big role in buying a house, but you may be playing the right game with wrong house. Let me explain. You’re a renter. You rent every month for a “unit” you don’t own. At the end of the year, you cannot claim your rent on your taxes as an expense unless there is a business involved and we won’t get into that right now. That is a monthly bill you cannot do anything with but pay.

Now, if you buy a house, you have the option to deduct mortgage interest and property taxes off your tax return and save some money every year. The interest on some lines of credit qualifies, also. Investors that own rental property can also deduct a percent of the purchase price every year. This gives you a chance to save money on a monthly payment most people have to pay anyway. At least this way you get some of that money back at the end of the year on your taxes. Now let’s go to the next level.

Your home plays a big role in your taxes every year. Although you do get a pretty healthy deduction on your house interest and property tax, it may not be your best interest to use that as an excuse to keep a mortgage on your home. I have heard many people tell me, “I don’t want to pay off my house because then I have to pay more in taxes”. Are you kidding me? Let’s run the numbers and see. Let’s say I get my 1098 form (which shows how much you paid on principle and interest for the year) from my mortgage company. I paid $5000 in interest and $1800 in property taxes for the year that I can deduct on my taxes. My mortgage payment is $1000/mth.

Here we go:

Total payments on mortgage and property taxes for the year = $13,800

Total deductible amount on taxes = $6800 Total tax savings = $1360


Now let’s pay off the house and see what happens:

Paid off house for twelve (12) months, Total in my pocket = $12000

Minus property tax and taxes I didn’t save = $3160

Total still in my pocket at the end of the year = $8840

Although there are investors like myself that don’t use this strategy on investment properties, the tax deductions are not a good reason to keep a mortgage on your personal home. The only reason I would keep a mortgage on my personal home is in case of a bankruptcy or lawsuit and a well written trust can protect against that and more because it gets the property out of your name (never leave valuable property in your name if you can help it).

As for your home, paying off your home and increasing your cash flow is worth more to your finances than keeping a mortgage, and a mortgage on a house you own is worth more than renting.

*This article is for information purposes only, consult a tax professional before making a decision.*