Author Topic: how does having a mortgage save you on taxes?  (Read 5527 times)

FuckRx

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how does having a mortgage save you on taxes?
« on: October 26, 2013, 12:29:45 PM »

if this has been covered before maybe someone can send me a link...
you hear people telling you to buy a house so that the mortgage interest will save you money...
how does that actually work?
totally hypothetical, let's say someone makes 200k/yr and buys a 500k house, what part of that mortgage payment and property taxes decreases someone's tax liability?

daverobev

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Re: how does having a mortgage save you on taxes?
« Reply #1 on: October 26, 2013, 12:56:40 PM »
The US is different to most countries, in that in most countries mortgage interest on your own home is not deductible.

For a rental property wherever, all expenses can be offset against income - excluding repayment to capital of a loan, obviously - but including property tax, mortgage interest, etc.

Unless you're losing money it won't actually reduce the dollar amount of tax you pay - fingers crossed it'll turn a profit, leaving you with some cashflow.

beltim

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Re: how does having a mortgage save you on taxes?
« Reply #2 on: October 26, 2013, 01:32:03 PM »
You can reduce the amount of income that is taxed by the amount of interest you pay on your mortgage, subject to certain restrictions.

Reepekg

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Re: how does having a mortgage save you on taxes?
« Reply #3 on: October 26, 2013, 01:45:57 PM »
In the USA, on your taxes you add things up and get your adjusted gross income (what you made minus things like IRA and HSA contributions). From that you get to subtract either your standard deduction or your itemized deductions from Schedule A (things like medical expenses, gifts to charity, and mortgage interest). You end up with your taxable income.

This means that if your mortgage interest + other deductions isn't greater than the standard deduction ($6100 individual, $12,200 married filing jointly in 2013), you don't get any benefit. If your deductions are high enough, you get to reduce your taxable income by the additional amount.

Let's say your $200k of income puts you in the 33% tax bracket. You basically then save 33% of your mortgage interest (over the standard deduction amount you would have deducted anyway) by reducing your taxable income.

In my humble opinion, it is nice to get a 33% off coupon from the government if I have a lot mortgage interest and I'll certainly take it, but it is a terrible reason to go out and buy a house. You still have to pay a majority of the interest. Primary residences should be bought for other reasons with this in the background, and shame on realtors who try to make it a big selling point.

If you're talking about mortgaging a rental property, that is a whole different story I don't know anything about. 


SwordGuy

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Re: how does having a mortgage save you on taxes?
« Reply #4 on: October 26, 2013, 03:03:13 PM »
The above answers provide the detail.  The short answer is, it doesn't.  Because if you bought so much house that it could, you're losing so much in interest that you aren't saving anything.

FuckRx

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Re: how does having a mortgage save you on taxes?
« Reply #5 on: October 26, 2013, 05:11:52 PM »
swordguy and reepekg thanks for the info, great explanations

okashira

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Re: how does having a mortgage save you on taxes?
« Reply #6 on: October 28, 2013, 05:42:57 PM »
Actually, it really doesn't at all. It's more of a tax break for higher income / more expensive house buyers.

To use it, you need to to itemize deductions.

But, itemizing deductions means you give up that $5,500 standard deduction.

On my house, a 3 bedroom with garage in a nice neighboorhood I pay approx, get this, $4900 per year in taxes and interest.

So basically I get no tax benefit from the house, because I use the standard deduction anyway.

Even if I payed $7500 per year in taxes and insurance (which would just mean I had a crappier mortgage then my 3.0% interest, or a more expensive house) I would only really gain from deducing $2000 (7500-5500) of that.

Dulcimina

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Re: how does having a mortgage save you on taxes?
« Reply #7 on: October 28, 2013, 06:27:18 PM »
Actually, it really doesn't at all. It's more of a tax break for higher income / more expensive house buyers.

To use it, you need to to itemize deductions.

But, itemizing deductions means you give up that $5,500 standard deduction.

On my house, a 3 bedroom with garage in a nice neighboorhood I pay approx, get this, $4900 per year in taxes and interest.

So basically I get no tax benefit from the house, because I use the standard deduction anyway.

Even if I payed $7500 per year in taxes and insurance (which would just mean I had a crappier mortgage then my 3.0% interest, or a more expensive house) I would only really gain from deducing $2000 (7500-5500) of that.

My mortgage interest is about $5000, same as yours, but my itemized deductions add up to about $11, 000 when I add in property taxes and income taxes.  If you are taking the standard deduction, and you pay state income taxes, then you might be leaving money on the table.

beltim

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Re: how does having a mortgage save you on taxes?
« Reply #8 on: October 28, 2013, 06:39:07 PM »
Actually, it really doesn't at all. It's more of a tax break for higher income / more expensive house buyers.


It doesn't for you.  It does for a lot of people, and it's really bad advice to say "it really doesn't at all" save you on taxes.  There are plenty of people who live in higher cost of living areas where there are no $165,000 houses.

okashira

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Re: how does having a mortgage save you on taxes?
« Reply #9 on: October 29, 2013, 09:53:34 AM »
Actually, it really doesn't at all. It's more of a tax break for higher income / more expensive house buyers.

To use it, you need to to itemize deductions.

But, itemizing deductions means you give up that $5,500 standard deduction.

On my house, a 3 bedroom with garage in a nice neighboorhood I pay approx, get this, $4900 per year in taxes and interest.

So basically I get no tax benefit from the house, because I use the standard deduction anyway.

Even if I payed $7500 per year in taxes and insurance (which would just mean I had a crappier mortgage then my 3.0% interest, or a more expensive house) I would only really gain from deducing $2000 (7500-5500) of that.

My mortgage interest is about $5000, same as yours, but my itemized deductions add up to about $11, 000 when I add in property taxes and income taxes.  If you are taking the standard deduction, and you pay state income taxes, then you might be leaving money on the table.

No state income tax.

I just want to point out that your tax savings will not be $11,000 * your marginal tax rate like everyone seems to quote. It will be (11,000 - 5,500) * your marginal tax rate. And if you get married, kiss that good bye since your standard deduction will go up.

And, $11,000? That's like half my entire living expenses. Yeesh.

okashira

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Re: how does having a mortgage save you on taxes?
« Reply #10 on: October 29, 2013, 09:57:17 AM »
Actually, it really doesn't at all. It's more of a tax break for higher income / more expensive house buyers.


It doesn't for you.  It does for a lot of people, and it's really bad advice to say "it really doesn't at all" save you on taxes.  There are plenty of people who live in higher cost of living areas where there are no $165,000 houses.

You are missing my point. First off, this is not a general finance forum, and I'm not giving general advice.
 If you are married, and buy a 200,000 house, you still won't benefit. Your standard deduction will be 11,000 - and you will need to buy a 300,000+ house to even start to marginally start to take advantage of the deduction.

And that's only if you have fully financed it.

AS it is, it primarily benefits married couples who buy 350,000+ houses with PMI. Even then, they are only about to deduct about half of what they think they are (because people don't consider the standard deduction.)[/b]

« Last Edit: October 29, 2013, 10:13:09 AM by okashira »

okashira

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Re: how does having a mortgage save you on taxes?
« Reply #11 on: October 29, 2013, 10:11:24 AM »
I just looked it up and the SD is actually $6100 this year!

That means, even if I had bought a house DOUBLE in price then the one I had, which would be a ridiculous, pristine mansion; outrageous for a single person:

My tax "savings" would be ($4900*2 - $6100) * .25 = $925

925 / (4900*2) = 9.4% discount on taxes and interest.

Which would only go down disproportionally fast as I pay down the mortgage.


I just want to point out the fallacy that people use that you will get a tax/interest savings equal to their marginal tax rate, which drives them to buy more expensive houses, when in fact it's not nearly as rosy.

DoubleDown

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Re: how does having a mortgage save you on taxes?
« Reply #12 on: October 29, 2013, 11:47:48 AM »
tl;dr:

In a high cost of living area,

Mortgage Interest Deduction + Property Tax Deduction + Investment Gains > Mortgage Interest Paid
------------------------------------------------------------------------------------------------------------------------------

In our very high cost of living area, the mortgage interest deduction is a substantial benefit, well above the standard deductions. And all itemized deductions are cumulative -- you don't get just the marginal benefit of the mortgage interest over the standard deduction, you get it all. As an example, if you have enough other itemized deductions to equal the standard deduction, then your mortgage interest is deducted fully at your tax rate, not just marginally over the standard deduction. Also, property taxes are deductible as well.

Where we live, we carry a mortgage that's ~ $420k, with additional ~$8k/year in property taxes (did I mention housing is expensive here?). I think last year those two items alone totaled somewhere around $30k in deductions. Combine that with all the other deductions (kids, charitable contributions, education, etc.) and it becomes a big deal.

Particularly at today's low interest rates, it's also a large benefit to take the money that would have gone into paying down the principal (thereby reducing the mortgage and associated interest), and instead investing that money elsewhere at a higher rate of gain. Since our mortgage interest rate is only 3.8%, with a healthy part of that deducted off of our taxes, it's a no-brainer to get a higher rate of return by keeping the mortgage and deductions, and instead investing in stocks/etc.

As others have said already, the mortgage interest deduction is not a reason in itself to buy a home, but it can be a nice benefit if you're carrying a large mortgage, particularly if you're a high earner. And I would always carry a mortgage in today's interest rate environment. Not to mention it's probably the best inflation hedge you can find, it's practically like free money.

Dulcimina

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Re: how does having a mortgage save you on taxes?
« Reply #13 on: October 29, 2013, 11:57:46 AM »
Okashira, I get what you are saying about not taking on a large mortgage simply because of the deduction.  But a condo in my building the size of mine would rent for ~$1100-1300.  A 3BR with garage space (in comparison to your SF house) would probably be more than double that.  So do I come out ahead by renting @ $1200 and taking the standard deduction, or by spending $1200 (PITI, condo fees/utilities) and getting charged $1200 less in taxes?

Quote
And, $11,000? That's like half my entire living expenses. Yeesh.
So? That's like half of my living expenses too. 

beltim

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Re: how does having a mortgage save you on taxes?
« Reply #14 on: October 29, 2013, 12:03:54 PM »
Actually, it really doesn't at all. It's more of a tax break for higher income / more expensive house buyers.


It doesn't for you.  It does for a lot of people, and it's really bad advice to say "it really doesn't at all" save you on taxes.  There are plenty of people who live in higher cost of living areas where there are no $165,000 houses.

You are missing my point. First off, this is not a general finance forum, and I'm not giving general advice.
 If you are married, and buy a 200,000 house, you still won't benefit. Your standard deduction will be 11,000 - and you will need to buy a 300,000+ house to even start to marginally start to take advantage of the deduction.

And that's only if you have fully financed it.

AS it is, it primarily benefits married couples who buy 350,000+ houses with PMI. Even then, they are only about to deduct about half of what they think they are (because people don't consider the standard deduction.)[/b]

I get your point just fine.  It's clear you have a firm grasp on the law, and you have given some good advice, like:
Quote
I just want to point out the fallacy that people use that you will get a tax/interest savings equal to their marginal tax rate, which drives them to buy more expensive houses, when in fact it's not nearly as rosy.
This is a really good point!  Your other statements, however, may be true for you but are remarkably limited in scope.  Yes, if you're married, live in a low cost of living area, pay no deductible state or local tax, contribute nothing to charity, and have no other itemized deductions, then you probably won't benefit from the mortgage interest deduction.  But one or more of these things are not true for the vast majority of people, and so it's worthwhile to actually do a calculation rather than blankly state "it really doesn't at all" save you on taxes.

dragoncar

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Re: how does having a mortgage save you on taxes?
« Reply #15 on: October 29, 2013, 12:06:34 PM »
Some of us blow away the standard deduction without even trying (eg state taxes), so writing off mortgage interest is extremely lucrative

okashira

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Re: how does having a mortgage save you on taxes?
« Reply #16 on: October 29, 2013, 12:45:56 PM »
Good points. I have never had a state income tax, so I didn't keep it in mind.