The U.S. Government wants to encourage Americans to be homeowners. A big part of it’s encouragement is in the form of a very generous income tax write-off to Americans who own their own homes. Many people who are renters overlook this big advantage of home ownership and don’t realize they would pay considerably less federal income taxes if they purchased a house vs. renting.
When you buy a home with a FHA loan (or any other type of home loan) you are allowed to write-off the mortgage interest of the FHA loan and your property taxes. This can result in the largest income tax write-off most people will have their entire lives. When you are renting, you do not have this income tax write-off, and much more of your paycheck is not going to you, but going to the Federal Government in the form of income taxes.
A very crude way to estimate how much you would save with the income tax write-off you receive when you purchase a home is to estimate the yearly mortgage interest you pay with the FHA loan + property taxes and then multiple that by your federal income tax rate. So let’s say you have a $300,000 mortgage at 5% and your property taxes are $4,000 per year.
-
$300,000 mortgage at 5% = $15,000 in mortgage interest per year
-
$4,000 property taxes per year
-
So you take $15,000 + $4,000 = $19,000 as your total income tax write-off
-
Multiply $19,000 X .30 (30%) Fed tax rate=$5,700 per year in income tax savings
….so you are saving $5,700 a year buying vs. renting! Divide that by 12 and that is $475/mo in income tax savings. You could look at it this way, a $1,525/mo rent payment would be equivalent to $2,000 house payment. Because when you rent you have no income tax write-offs if you are salaried, so you are paying $475/mo more in federal taxes than if you were a homeowner.
After you buy a house, if you are paid W-2, you can talk to your HR Dept. and change your deductions on your W-4 and have less federal taxes taken out of your paycheck, so you will take more home every month.
The tax advantage is a major reason over the long haul why homeowners build more wealth than renters. Most people who are renters never have a big enough deduction to make it past the standard deduction and therefore pay the maximum in federal income taxes.
There are also additional items that you can write-off your income taxes on the year the you purchase. The biggest incentive is the special $7,500 tax credit that is being offered by the U.S. Government for buyers who haven’t owner in the past 3 years and buy a house by June 2009. This is part of the Government stimulus package to revive the U.S. Economy. This tax credit allows you to 100% wipe away up to $7,500 in federal income taxes. And if you have less than $7,500 in income taxes, the Government will refund you the difference. So if you only owe $2,500 in income taxes, the Government will send you a check for $5,000 for the difference!
Additionally, in the year you purchase you can write off points paid to buy down the mortgage interest rate and certain closing costs associated with buying. This is can be an additional substantial income tax savings. You can also write-off the mortgage insurance associated with an FHA loan.
So in summary, if you are renting, you should take a look at what you are paying in rent and what you would be paying monthly as your total housing cost if you were to buy with an FHA home loan. Then subtract the monthly tax savings from the housing payment and see how it stacks up against your rent payment. And don’t forget when you buy you are not just paying mortgage interest, you are ALSO paying down the principle of the FHA loan, to where you will one day own the house free & clear with no loan on it! When you rent you are only paying your landlord so HIS house (not yours) will one day be free and clear.
Please call or email me if you have any questions or would like to discuss qualifying for an FHA Home Loan or any other home loan financing.
Warm Regards,
Rob Chomentowski
Sr. Loan Officer and FHA Specialist
Affinity Financial
858-922-7899 (direct)
