Taxes, The Home 

Mortgage Interest Deductibility Not That Great

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Foobarista made an excellent point in my Devil’s Advocate post titled “Rent Forever, Don’t Buy A Home that I felt was worth repeating:

The other thing about the mortgage interest deduction is you have to itemize to get it. Given that the standard deduction is quite high now, $10500 for married, filing jointly, only the amount of your itemized deductions above $10500 is actually a “win”. If you have, say, $12000 in mortgage interest and pay $4000 in property taxes, the “tax free” part of your mortgage is really only $5500, not $12000.

I lot of folks look to buy a home in part because of the great benefit of mortgage interest deductibility, but they fail to realize that you need to pay a lot more in interest and taxes than the standard deduction in order to come out ahead if you plan on getting married (and if you bought a home for that particular reason, which is probably a mistake in the first place). Just something to chew on… anyone have any thoughts? I’m surprised I hadn’t heard this mentioned earlier by anyone, probably because everyone I talk to on a regular basis is single, but I would think that it would’ve at least made its way into a mainstream article or something.

{ 14 comments, please add your thoughts now! }

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14 Responses to “Mortgage Interest Deductibility Not That Great”

  1. Jeremy says:

    Even though the standard deduction is quite high, I would have to say that most people who are in the first few years of homeownership will come pretty close reaching the standard deduction amount over the course of a year. Even a modest 30-year fixed mortgage of $150k at current rates will put your interest payments at around $800-$900/month in the first few years. So the interest alone on this relatively small mortgage will be very close to reaching the standard deduction amount. And that is not even taking into account property taxes yet which will be a couple thousand depending on location.

    Then you have the beauty of itemized deductions which would make anything above and beyond that as gravy. Once you begin to itemize you can find plenty of qualified deductions to increase your benefits even further: medical expenses, some job expenses, charaitable contributions, state or local income and sales tax, etc.

    So the way I see it, if you buy a house, even a modest house you will likely approach the standard deduction amount anyway after interest and taxes, and then any additional deductions will just be an added benefit. Clearly there are instances where this won’t be the case, but more often than not you will be able to go above and beyond the standard deduction, which no matter how big or small is a good thing.

  2. laura says:

    I just got my tax statement for my mortgage interest, and it is far less than the standard deduction for single filing. I’ve made some charitable contributions, and have some medical expenses, but I’m not sure I have enough to to make itemizing worthwhile. I was looking forward to a large deduction, too! I’ll report back after I file. (if I ever fix my website, changing hosts is a pain).

  3. mapgirl says:

    hm… I’m single and my mortgage interest with property taxes, business expenses, charitable deductions always makes it worthwhile for me. I see the point they are making, but I find owning is still a better proposition for me than renting.

  4. Pete says:

    I never really thought of a mortgage deduction as a reason to buy a home, anyways. It is a good point, yet they also forgot many people have state, local and charitable deductions. Thus for me, my mortgage interest is not going to kick me in or out of the standard deduction because I have always itemized my deductions (even before buying a house when I was single).

    Yet, for many who use the standard deduction, it is a good point. So, do not think about of buying a home as a tax deduction rather a possible way to reduce your mortgage interest.

  5. TFB says:

    JLP wrote about this last year. He had an example with numbers showing the actual tax benefits from mortgage deduction is a lot smaller than most think. Here’s the link:

  6. Michael Mueller says:

    I have not read the entire portion of the earlier post. However, it seems that the math is not including the increase in value of the real-estate that belongs to the owner, not the renter. Certainly you can say that if you purchase a modestly priced home you may not attain as much as the standard deduction, however, if you move in 3 -5 years, you get to sell the property and not just wave good bye to your money.

  7. moominoid says:

    I’ve often seen this point about mortgage interest deductibility pointed out actually… and high income folks start to see new limits on deductibility at the top end.

    Contrast this to the popular view that you should get a mortgage to get a tax deduction! The tax deduction does reduce the cost of a mortgage but not by that much in many cases.

    I live in NY and so hit the itemization level almost due just to state taxes.

  8. samerwriter says:

    Mortgage interest also starts to phase out (along with all other itemized deductions) if you make above $150,000 (single or married).

    And if you get hit with AMT, you may miss out on home equity loan deductions (unless the loan was used entirely for home improvements).

    IMO, buying a home for the deduction is not a great idea. If home ownership isn’t its own reward, then you’re better off renting.

  9. Vince says:

    It seems to me that if you sell in 3-5 years, unless you have some significant home value appreciation, you would still come out worse than an apt. The reason being you don’t really have significant principal built up during that time period (your mortgage payments were mostly interest), you’ve paid higher homeowner insurance premiums (vs. renter’s ins), property taxes, repairs and higher utilities (vs. an apt) that you don’t get back when you sell unless the home value appreciated by that amount. (Even then the time value of money has erroded that so you really need an even higher rate of return). Plus, don’t forget the agent’s 6% that you, as the lucky seller, get to pay.

    From a financial perspective I think homeownership is, at best, break even. But the intangibles of homeownership are a different matter.

  10. Chris says:

    I didn’t buy my first home for the itemized deductions and agree with someone above: you’re forgetting about the appreciation of the property. I could have never built $200k in equity by renting over the past four years (New Jersey RE may be different than other parts of the country so the appreciation has been amazing (I got in at the right time; part age and part luck). That is the true value for me. However, I do agree with what you say for many first time buyers.

  11. Matt says:

    If that’s the only reason one is buying, then yes it’s a pretty stupid one. Even a fanatical tax-hating minarchist like me, who’d literally prefer to set his money on fire than to send it to Washington wouldn’t buy a house for that reason alone.

    The tax writeoff is simply one of the many benefits of owning a house…and in the grand scheme of things, it’s a small one. (By the time I get married, I’ll already have refinanced the mortgage to the point where annual interest probably won’t push me above the standard deduction for singles, let alone married couples…most of my deductions come from Schedule C losses and IRA contributions, which don’t require itemizing anyway.)

    2007 is probably going to be the last year I itemize. (3 months interest in ’06, plus my normal charitable donations put me $1300 above the SD, and it’ll be well past March before I can complete the refinance. But by the end of the year, I’m going to be paying way less in interest, and total interest payments for ’08 almost certainly won’t be enough to push me over…especially since, according to plan, my ’08 taxes will be filed as “married”.)

  12. steve lang says:

    I looked into this years ago when I first bought a house, actually rented it out. Only 25% of taxpayers itemize deductions, almost all of them in the upper income brackets, according to the WSJ. So regardless of whether it is a good idea or not (it usually is of no benefit) very few people take advantage of it, almost none of them middle class. Which doesn’t stop the real estate industry from touting it anyway.

  13. rob says:

    If the mortgage deduction is so valuable why do we keep trying to refinance to get lower rates? It seems that we would want higher rates for higher deductions? I think the best thing to do is pay off your mortgage as soon as possible.Home ownership is great but there are better investments out there.

  14. Kevin Mack says:

    No one’s situation is identical, but if you live in NYC or California and make over $80K, your state income tax alone will likely be more than the standard deduction, thereby enabling you to deduct all of your mortgage interest on your federal tax return (subject to the itemized deduction phaseout, if applicable to you income level). This is a major benefit for people in this situation, especially since homes in these areas average $1M+, with annual mortgage interest on the home easily over $25K.

    More importantly, the mortgage interest deduction is allowed under the AMT, another great benefit of the deduction! So, in sum, the mortgage interest deduction helps some more than others, but for those in high income states with large mortgages, it can significantly reduce your tax burden.

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