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Home
Ownership vs. Renting |
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Can
we save money on our taxes if we buy our own
home?
What’s the scoop on
Tax Savings?
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Is
it true we can save money on our taxes if we
buy our own home?
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How
much?
I'm sure you've been told that buying your home
has great tax benefits. Most people don't understand
how to harness the tax advantage of buying their
home to help them buy a home they never thought
they could afford.
Let me give you a true scenario.
Jack and Sue live in an apartment. Together
they have a taxable income of $48,000 after
itemizing their deductions. They have two children
and have reasonably good credit. When we're
talking, they tell me that they're paying $800
per month in rent right now. They're looking
at homes in the $122,000 price range so they
can keep their monthly payment including taxes
and insurance in the $1,000.00 range.
They also tell me they really like a home they
saw in their friend's neighborhood, listed for
$143,000 but know they can't afford it at this
time. The price of the home is about $21,000
more than the price range they are considering.
The additional $21,000 in sales price equates
to about $147.00 per month in principal and
interest payments than what they feel they can
afford. As I speak to them I can see that the
home they are talking about is the home of their
dreams. In their minds, and other agents have
agreed with them, that their "dream home"
will have to be their "move up home".
They are resigned to the fact that their "dream
home" will be one they can afford only
after they purchase one of the current homes
they are considering.
During my conversation with Jack and Sue, I
asked them how much rent could they afford if
their present apartment rent went up from the
$800.00 per month they are paying now. Their
answer is they can afford $1,000.00 per month
and maintain their lifestyle with no major inconveniences.
That's why they decided to keep their purchase
price in the low $120,000 price range because
that payment would be about $1,000.00 per month
including taxes and insurance.
I asked Jack and Sue if they would buy their
dream home right now if I could arrange for
their payment not to exceed the $1,000.00 payment
they are willing to pay. Of course they had
to say they would! After they dared to dream
just for a split second they came back to reality
and they reiterated quickly that they could
not afford the additional $147.00 per month!
That amount would put them over their monthly
budget!
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At
that point I showed them the following: |
| a. |
The
federal taxes they paid last year on
their $48,000 income was $8,507.00 based
on them filing an itemized joint married
return. |
| b. |
I
reminded them that the interest paid
on their new home is tax deductible. |
| c. |
Interest
payments on their dream home's loan
of $143,000 at 7.5% would be a little
less than $10,725 in first year interests
deductions. |
| d. |
If
they deduct the $10,725 from their previous
itemized tax deductions for the previous
year, their federal taxes would have
been based on $37,275 adjusted income
rather than the $48,000. |
| e. |
A
federal tax based on an income of $37,275
is $5,591.00 rather than the $8,507.00
they paid. |
| f. |
The
difference in savings of the two taxable
incomes is $2,916.00 annual savings,
or about $243.00 per month. |
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Their
response was that they knew that their taxes
would go down. But they were unable to wait
until April 15th in order to get the $2,916.00
tax rebate check in the mail! They had a family
to raise and a budget to meet and they didn't
want to starve to death before April 15th waiting
for their refund check to show up!
What they didn't realize was that they could
go to their Personnel or HR Department and raise
their exemptions to a point that they could
actually receive $243.00 greater take home per
paycheck. They, like most people, are under
the mistaken impression that they can only count
people as exemptions. They did not realize you
could legally claim exemptions based on legal
tax deductions they are entitled to.
So if their new payment came out to be $1,147.00
per month PITI, (Principal, Interest, Taxes
and Insurance) they could offset that payment
with the additional $243.00 per month take home
pay to effectively bring their dream home payment
down to $904.00! That's well within their range!
(This is an example only to explain
the general concept. Please check with a tax
advisor for specific details and up to date
tax charts)
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