Is buying a house the right thing to do at this stage in your life? Many people have the perception that home ownership is much more expensive than renting. What you may not realize is that for the price of renting, you can probably own your own home. It may not be the Castle of Versailles, but it will be a home you can call your own. A home that can build equity and a secure future. In most cases, your home will be your single biggest asset with tax advantages that you couldn’t take advantage of while renting.
For instance, if you own a house, the government allows you to deduct mortgage interest and real estate taxes from your gross income amount through a “Schedule A” tax form. This means you will pay less tax to Uncle Sam if you own a home. Recent tax laws also state that first-time home buyers can use money from an IRA (Individual Retirement Account) for the down payment on their new home. Let’s look at an example that will compare the tax benefits you would receive from owning a house rather then renting.
EXAMPLE: A married couple has a combined gross income of $70,000 per year. They have some money in a savings account and an IRA totaling $25,000. The couple cannot decide whether they want to purchase a home or stay in their current apartment. Their current rent is pretty cheap at $700 a month. They know that owning a house costs more than that. But does it?
The couple is looking at a house that is priced at $125,000. Because of the new tax laws that allow you to utilize money from IRAs, the couple has enough to cover a twenty percent down payment (smaller down payments are also available – for more information visit the our Web Page titled Establish your Down Payment).
After the down payment, the mortgage comes out to $100,000. On a mortgage of $100,000, the couple’s monthly mortgage payment is $900 (principal + interest). Because the interest is always higher at the start of a mortgage, the split of the $900 comes to $800 in interest and $100 in principal. Using the “Schedule A” tax form, the $800 a month will be tax deductible. The property taxes equal $2,500 a year, and you can deduct those costs from your taxes as well.
| Renting Scenario | Buying Scenario |
| Gross Income $70,000 | Gross Income $70,000 |
| Current Rent $700 | Mortgage Payment $900 |
| Total Paid Per Year $8,400 | Total Paid Per Year $10,800 |
Here’s where the accounting comes in. The renting scenario uses your basic tax form where the buying scenario using a “Schedule A” Form. Let’s play the example out factoring in the tax advantages.
| Renting Scenario | Buying Scenario | |
| Gross Income | $70,000 | $70,000 |
| Yearly Mortgage Interest | $0 | $9,600 |
| Property Taxes | $0 | $2,500 |
| Deductible Withholding Taxes | $0 | $4,165 |
| Taxable Income | $70,000 | $52,800 |
| Taxable Income After Other Standard Deductions | $58,200 | $48,635 |
| Income Tax Paid | $11,090 | $8,402 |
If you divide the $2,688 of tax savings into twelve months, you determine a tax savings of approximately $224 per month. Subtract the $224 from the $900 mortgage payment and you get an adjusted total of $676.
While the $700 per month apartment originally appeared to cost less than the $900 per month house, factoring in $2,688 of tax savings shows that building equity by owning your own home can actually cost less per month than renting a property you will never own.
For more details on the financial advantages of home ownership, contact one of Todd Sandler Realtors’s agents. At Todd Sandler Realtors, your satisfaction is our most valued asset.