When considering tax, it’s true that the deck is stacked in the homeowner favor. To illustrate, let’s assume both a homeowner and a renter are in the 25 percent tax bracket and earn $60,000 annually. The renter pays $1,000 in rent and the homeowner pays $1,000 a month principal and interest on a $150,307, 30-year loan at 7 percent. The homeowner also pays out $1,500 a year for property taxes.
When tax time rolls around, the difference in taxes paid is significant. The renter pays income taxes on $60,000 income, or $15,000 (25 percent tax bracket times $60,000). The homeowner, however, can deduct $11,973 ($10,473 interest plus $1,500 property taxes) from his $60,000 income before calculating tax liability. Subtracting this deduction from income leaves $48,027.
Multiply this by the 20 percent tax bracket and taxes paid come to $12,007. The savings is $2,993 for the year, or $249 per month. You can also look at it as an $8.30 per day penalty for renting when you divide the monthly savings by 30 days. So no matter how you slice it, Uncle Sam is willing to pay you to become a homeowner! Even though this example is typical case, it’s a good idea to consult a CPA or other tax professional to determine the exact deductions for your situation.
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