Tax Benefits

Real Estate

Tax Benefits of Buying a home vs. Renting

For many first time home buyers, it can be difficult to see beyond the initial stress of the down payment.  Besides the fact that many people qualify for mortgages with as little as 3-5% down, the long term tax benefits of home ownership are substantial.  The example below illustrates this clearly.  In addition, there may be additional deductions in the first year associated with loan origination and moving expenses.  Please consult your tax professional for specific details on your personal situation.

Vladimir is a single, childless guy who rents a house for $1200 a month. His adjusted gross annual income is $128,000. He has $3500 state income tax withheld from his paychecks during the year and qualifies for no itemized deductions. His federal income tax liability for the year:

Adjusted gross income: $128,000

Standard deduction: single $4400

Personal exemption $2800

Taxable income $120,800

Vladimir's 2008 federal income tax: $32,129. Ouch! That’s a lot of Wii games!

But if Vladimir buys a house with a mortgage payment of $1200 per month, everything changes:

Adjusted gross income $128,000

Itemized deduction for state income taxes: $3500

Itemized deduction for real estate taxes: $1500

Itemized deduction for mortgage interest: $11,400

Personal exemption $2800

=taxable income: $108,800

=Vladimir’s federal income tax: $28,409. He just saved almost $4000 by buying a house instead of paying rent.