patrick.net

I may be wrong here, if I am please correct my math.

$11,400 is the standard married deduction. If you have kids add $3,650 for each of them.

A good number of people who are on this board are in CA so I will use a $375K house for this.

A $375K 30 year @ 4.5% is like 16K in insterest the first year. so a married couple, no kids would get around 4.5K larger deduction from just the mortgage interest. Add in property taxes to that ~$4.5k so your around $9K total over your standard deduction. Since you are now itemizing lets throw in $1000 worth of charitable contributions to even it out at $10K.

If you are in the 25% tax bracket that is worth about $2,500.

Assuming the standard deduction does not go up in year 15 your interest payments will be about the same as the deduction so there is really no benefit there. You can still itemize and write off your property taxes and whatever else.

The kid's deduction is separate. You get this whether you itemize or take the standard.

And you can deduct state taxes too. Don't forget to add those.

A rough rule of thumb in California is that property taxes would equal your federal tax benefit from interest deduction

?

Sometimes this place reminds me of the Motley Fools smuglets... gee wiz I made a fortune an an didn't need no broker and.... (insert some random inflated amount to show allegiance).

Yeah yeah buying is bad, ok, but not always!

The mortgage deduction like quite a few things has the potential when used properly, to be an awesome help to those who do not abuse it understand it and have a technique and plan to do so. Because the power elite own property there are a bundle of incentives that are part of ownership. Taken together, depreciation, property tax, mortgage expense, and certain rental situations on a first residence and/or illegal unit give a person incentives (shall we say?)... to own property. Might as well take advantage of them.

The mortgage deduction strips down earned income considerably, I keep my first morgages to almost half my earned income. why? because, the risk is minimized, my value is there not underwater. I take the money I would pay down and put it in more property that maintains its value, and I made sure I had an inlaw so I could get some rent income to offset this expense.

Like another poster said, this paid property taxes. The rent deduction does not allow for the same flexability and amount, I mean I guess you could find a way to rent out part of a rental and you could pay a lot in rent.... Its theoretically possible eh?

In short, it is something, but it is not huge; worthwhile if you have money you are investing at a higher rate than the benefit, but if you don't? If you earn 100K/year, file separately, pay 25% in Fed, State and City taxes, have interest of 20K/year your taxable income is 80K - other deductions, which could save you 5K over all in a refund the next year. This is just a rough calculation. Am I completely mistaken?

E-man,

I am not from the Bay Area.

The numbers show that there is little net benefit; covering your property taxes and possibly hazard insurance still isn't much benefit.

The MSM, most realtors, and most of yours and my neighbors believe it is a very valuable benefit - and the numbers don't prove out like that.

They spend $1.00 to save 28 cents - that isn't "benefit" - that isn't sound financial decision making.

Quant HF Mgr

last year our standard deduction was higher by a lot. But we spent 160k on our house, not 360k-600k like the bubble losers on our block.

JS

That has to be the case (referring to your post). Unfortunately there are people looking to justify irrational behavior and will do things like get mortgaged to the hilt, buy a boat with borrowed money and all the while proclaim the tax benefit they are getting.

Despite these idiots the original financial concept is still sound: if you can mortgage out borrowing at 5% and make 7% of a return, and on top of that get another 2% with the tax break.... well you are effectively borrowing at 1%. BUT what one does with the money is important!

Again, some people take that money that could be used to pay the mortgage and waste it and others put it in a financially liquid, compounding environment....

In this environment with the dollar so weak it is almost better just to pay off the mortgage! lol there is not much one can do with extra dollars, unless one is a professional investor in which case one should be buying up property, or getting ready to buy up if one believes in the pro verbial "bottom" of the housing market we are yet to get hit with.

I've never understood the tax deduction "benefit".

Whatever the deduction, I'm still out-of-pocket for the amount of the interest and taxes, etc. I don't care where the money goes after it's not in my pocket. It's still not in my pocket.

The bottom line is - how much does housing cost in total. If rent is $1500 and mortgage, taxes, insurance and maintenance is more than $1500, then the "tax advantage" is the delta between what I would have spent for rent and income taxes w/out owning and the amount I spend for mortgage, taxes, insurance maintenance and income taxes.

Most important thing to add in the equation is the decline in home equity. If you had not lost that equity, lets says for 5 straight years in a row, how much returns you can get over the life of the loan, if you have that equity money to play with - most overlooked formula in the equation in the current environment of tanking home equity.

yougoawaynow says

I’m still out-of-pocket for the amount of the interest and taxes, etc.

You are very close. It only makes sense to do give away interest and taxes ONLY when there is at least 2 to 3%(to match rent increase) home price appreciation otherwise you are better off renting that same house. This is a very conservative estimate. Appreciation rate should be much higher then that to justify that big mortgage,otherwise you are a slave of bank and you are not getting any returns on your money.

I think "Tax Advantage" is a misnomer. A better term is "tax factor". In some situations the increased deduction is better, in some it is worse. The "advantage" depends on your income, state deductions, children, etc.

It is disingenuous to say that the tax implications are always an advantage. It's not like the IRS doesn't know how things work and a buyer has just figured out how to save themselves considerable cash.

So yes, most people have no clue. I have a friend who just bought a 1.3 million dollar home (and can afford it) but has no idea how taxes really work.

kronicade says

I think “Tax Advantage” is a misnomer. A better term is “tax factor”. In some situations the increased deduction is better, in some it is worse. The “advantage” depends on your income, state deductions, children, etc.

I agree. The "tax benefit" is already included in the price of the house. If there were no mortgage interest deduction, then prices of houses would be lower.

A good comparison is the bond market -- muni bonds have a lower overall rate than certain other bonds because of their tax benefits, but the overall economics are very similar when you compare risk to reward.

The second operative point here is what Quant said in his/her second post -- that you are paying $1 to save 28 cents. The tax benefit is a reduction in the interest rate, not a net benefit. If you pay interest, then you get a reduced interest rate. Therefore, the mortgage interest deduction itself shouldn't concern you as much as whether taking on debt at a particular interest rate is a good idea in comparison to other alternatives.

These last several posts making it clear. If one is borrowing for a 4% loan, the reduction is say 1%, so one is paying 3% instead of 4%. This actually works out well for the 100K income with a 4% loan. The key of course is realizing that most of us are borrowing to live in something we really aren't affording and may be taken in by an inflated idea of "saving" money, when we are merely saving 1% on interest rate.

Therefore, the 28 cents saved on each dollar of interest paid seems high, no? Should it be more like 10 cents on the dollar?

However, in favor of "buying now in these horrid economic times" is the following:

1. Prices are down.
2. However, finding what one likes and needs may cost more and not be a good deal.
3. This may justifying borrowing, IF one can afford it.
4. Affording it is not making the payments, but rather looking to see how much more the house is costing you because you can not afford that particular place now, even though it is a solid well built building, in a hood one likes, etc.

Add common charges/monthly costs of house or condo and interest paid per month. This is your "rent" assuming you are not buying for investment or have money that is earning more that 4%.

If one does not have such a 4% + percentage, then one may think carefully about borrowing and best not.

E-man says

You’re kidding me, right? I guess renting is the way to go. Spend $1 and get nothing back is better than getting 28 cents back.

most peoples choice is to spend $1 renting and save $5 to invest. Or spend $6 on a ballooned property and get 28c back... if standard deduction isn't better atm. At some point wall street has changed our nation from a conservative type where housing is just a shelter, to a nation where everything is measured in number of dollars, and at that point speculation. houses in many areas are still based off speculation.

E-man says

You’re kidding me, right? I guess renting is the way to go. Spend $1 and get nothing back is better than getting 28 cents back.

Actually, for me, it's more like "Spend $1 and get 28 cents back" vs. "Spend 60 cents and get nothing back and use the other 12 cents for other stuff like savings." The calculation for others might be different.

E-man says

You’re correct. This is the reason why having a good CPA is key if you’re in the high tax bracket or owning a business :)

If you don't want to deal with tax returns or feel uncomfortable, sure, hire a CPA. But if you know tax rules well, it doesn't make that much of a difference for most people.

I think the entire point is that the mortgage interest deduction is often overstated as an advantage.

If someone wants to do the following, I think it would help out out a great dea. Just do the first year(year of greatest advanatage) and caveat that the subsequent years will result in a diminishe advantage:

Assume income of $100K, $10K per year 401K contribution.

-Single person renter vs $300K owner.

-Married couple, same parameters.

-Married couple, renter vs $400K owner.

Results should be enlightning.

For the sake of parity one should assume historical returns for each investment.... over anything that is really long hall stocks are the best.... 10% or so over 30 years or so... Real estate MEANING the great land gushing oil, the home you couldn't flip, etc, is the second highest but when factoring leverage and liquidity it is as said: "the cheapest way to borrow", or use leverage to amass a large sum of money.

Many posters assume real estate has a certain value when the real value of a property is always what a buyer will pay. It is a specious argument to assume real estate is chronically over or under valued....it is in fact cyclical. Right now it might be shitty collaterial but it will cycle through this like all market commodities.

calculator to show how much you would save on mortgage interest deduction:
http://www.bankrate.com/calculators/mortgages/loan-tax-deduction-calculator.aspx

darrellsimon says

Real estate MEANING the great land gushing oil, the home you couldn’t flip, etc, is the second highest

Not true:

http://finance.yahoo.com/news/What-Best-Investment-Stocks-atlantic-4214432520.html

Of the asset classes shown, first is stocks, then AAA corporate bonds, then gold, then, long-term Treasurys, then housing. There are also many other asset classes not even mentioned that produce better returns than housing.

Your factoring in commercial real estate? land? Over how long a period of time?

OK maybe but no class of assets has been responsible for more transfer of wealth and when factoring leverage there are some factors that make the mortgage deduction and owning real estate a smart investment.

My point was, and is, when used properly the mortgage deduction allows one the leverage to use arbitrage and no other asset class allows this unless one is a bank.

corntrollio says

“Spend $1 and get 28 cents back” vs. “Spend 60 cents and get nothing back and use the other 12 cents for other stuff like savings.”

Right on. No point in spending $1 when there is no guarantee that $1 will fetch anything in short term.

darrellsimon says

My point was, and is, when used properly the mortgage deduction allows one the leverage to use arbitrage and no other asset class allows this unless one is a bank.

Yes, and your comment is inapposite to any claim about commercial real estate. As I mentioned, there are any number of asset classes not on that list, but we were talking about residential, not commercial, and specifically single family homes and individual condos.

darrellsimon says

Your factoring in commercial real estate? land? Over how long a period of time?

I'm not sure about over the last 50 years like the other data I sent, but VGSNX, the Vanguard index fund for REITs, has returned 7.6% annually in the last 7.5 years and 3.31% in the last 5 years, which is quite good, but that's not long-term. The index is about 1/6 residential, but I'm assuming that's not individual single family homes for the most part. REITs themselves have only been around for about 50 years.

Current & futures buyers in highly inflated areas who use mortgatge interest tax savings as a reason to buy...are as foolish as people who buy equities solely for dividends. Sure, you might receive 3% in dividends...as your stock falls 20% in value. Oops; better take a closer look at your math on that!!

Quant HF Mgr says

Current & futures buyers in highly inflated areas who use mortgatge interest tax savings as a reason to buy...are as foolish as people who buy equities solely for dividends. Sure, you might receive 3% in dividends...as your stock falls 20% in value. Oops; better take a closer look at your math on that!!

If anyone uses interest rate write off as a reason to buy they are seriously terrible at math.