Monday, January 16, 2012

Beware of Mortgage Debt to Save on Taxes

Until 2010 I was a renter.  This seemed to annoy quite a few people.  I am not sure why, but it did.  Some wanted to sell us a home, others wanting to sell us debt to buy a home, and those who believed home prices would continue to soar.  We did buy, once we found a home where the cost per square foot was slightly less than we were paying in rent.  We moved 4 blocks.  No big change, just a decision driven by the numbers.

During those years as a renter we kept hearing the same old question "but don't you want the tax write-off?"  I was always surprised that those asking the question did not really seem to understand what the write-off was.  Sure, they knew that interest on a mortgage and property taxes were deductible from their federal income tax.  What they didn't seem to know was that we already got a write-off.  It was called the "standard deduction".   In order for a home purchase to actually save me money, my mortgage interest, taxes, and other itemized deductions would need to exceed the standard deduction.  In most cases that translated into a hefty mortgage payment on a home with high property taxes.  I'm frugal, and that was not my plan.

If you are currently a renter and are considering a home purchase, keep the following in mind.  The 2012 standard deduction is $11,900 for a married couple, $8,700 for head of household, or $5,950 for a single filer.  That means in 2012  mortgage interest, property taxes, and other itemized deductions (charitable deductions for example) need to exceed $11,900 for a married couple to "save money".  Even if it does exceed that amount, the savings may not be that great.  For example, a couple earning $80,000 that has $15,000 in deductions may save $620 that year, or $50 a month (using back of the envelope calculations).  I can think of several ways to save $50 a month that do not involve taking on mortgage debt.

To be frugal means you need to be skeptical.  If someone is telling you that a purchase will save you money, remember, that person makes a living off of what they sell.  They are biased.  Run the numbers yourself and determine if it really saves you money.

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