Home Mortgage
Why are home mortgage loans seen as a tax benefit?
I plan to buy a house and wanted to know why everyone thinks that the home mortgage is tax beneficial. Example: – If we pay around $ 15,000 a year in interest + property taxes and VAT (15% tax bracket) we get back about $ 2K-3K and we are happy. Its like pay the government $ 100 and get back $ 15 and we are satisfied with it. correct me if I am wrong
You are partly wrong. If you pay $ 15,000 a year in interest and property taxes and you are in the 15% tax bracket, you get to reduce that $ 15k of your income. This means you will pay $ 2,250 less in federal income taxes. So in other words, you pay $ 15k to save $ 2k. It is not good business acumen, but it's better than not saving anything … but it is not the whole story … it becomes worse. You get to deduct only the $ 15k IF AND ONLY IF you itemize your deductions (rather than take the standard deduction). If you are married, your standard deduction is $ 11,400 ($ 5,700 if you are single). Since you're paying $ 15k in interest rates / taxes, you get to deduct an extra $ 3600 than you would otherwise have been entitled to anyway. Therefore is your net tax benefit is really not $ 2,250. It is only $ 540 (15% of $ 3,600). But wait … it gets worse … You are only paying $ 15k in interest / property taxes the first years of the mortgage. Remember that part of your mortgage payment goes to principle. While your payment each year will be the same amount goes towards the principle and the amount goes to interest rates will change. Finally, to 15k $ payment each year will be only a couple thousand worth of interest … at which time there is ZERO tax benefit.