Tax Benefits of Buying a Home

June 23, 2010

Often when people look at the cost of buying a home versus renting, they do a side-by-side comparison of their current rent to the cost of a mortgage payment plus condo fees and property taxes. Often renting seems cheaper. And sometimes it actually is. But to get a true assessment of what makes more financial sense, you can’t forget to factor in the tax benefits of owning.

When you own a home, you can deduct the interest paid on your mortgage (which in the early years is most of your monthly payment) as well as your property taxes from your annual income. And in Massachusetts, you get an additional state income tax deduction. Here’s how it works:

SAMPLE CONDO PURCHASE PRICE: $335,000

ANNUAL PROPERTY TAXES: $1891 ($157.58 per month)

MONTHLY CONDO FEE: $104

With a 20% downpayment, mortgage amount is $268,000

Let’s assume a 5% mortgage interest rate on a 30-year loan

Monthly principal + interest on the mortgage = $1438.68

TOTAL MONTHLY PAYMENT (principal + interest + taxes + condo fee) = $1700.26

However….

The approximate interest portion of each monthly mortgage payment is $1,100 (averaged from amoritization table)

Let’s assume you’re in a 28% tax bracket

$1,100 x .28 = $308 monthly tax benefit

And your monthly property taxes are also deductible, so…

$157.58 x .28 = $44.12 monthly tax benefit

Plus MA taxpayers also get a State tax benefit from the 5% income tax

$1,100 + $157.58 x .05 = $62.88 monthly tax benefit

Let’s add up your total monthly tax benefits:

$308 + $44.12 + $62.88 =$415 monthly savings

By factoring this savings in, you get your…

ACTUAL MONTHLY COST (monthly payments – tax savings) = $1285.26

What this means to you

If you are currently paying $1500 a month in rent, just looking at your monthly mortgage, taxes and condo fee expenses of roughly $1700 might make buying this condo seem like a bad idea. But by factoring in the tax benefits and knowing that your effective monthly cost is less than $1300, you can see a clear financial incentive to buy.

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