Should you buy or rent a home? If, like most first-time buyers, you are presently renting, it’s easy to calculate your cost – simply, the monthly rent you pay. (Utilities, phone, cable, and other costs can be ignored in this comparison because they’ll be approximately the same whether you rent or buy.)
But calculating the cost of home ownership is much more complicated, because income tax considerations affect your bottom line. And there is, in addition, the uncertainty about how much the value of your home will rise (or even fall) in the coming years.
As a tenant, you may be taking a standard deduction on your income tax return. This is the time to judge how that standard deduction stacks up against the amount you’d be able to subtract from income if, like most homeowners, you itemized deductions instead.
Once you itemize, you may be able to deduct all of the following
- Home mortgage interest;
- All real estate taxes on any property you own;
- Your state income taxes
- Medical and dental expenses that exceed 7.5% of your income;
- Personal property taxes if your state has them;
- and most important – Certain moving expenses
At the start of a mortgage repayment schedule, when the debt hasn’t been reduced yet, almost all of your monthly payment goes toward interest. A bit goes toward reducing principal (the amount borrowed), so that the next month you’re borrowing a bit less, and owe a little less interest. That allows more of your next payment to go toward reducing principal. However, this process is very slow in the beginning and the interest portion remains high for many years.
Between the >mortgage interest and the property tax deductions, you can figure that Uncle Sam is shouldering part of your monthly mortgage payment – 28% of it, in fact, if that’s your tax bracket. Your state income tax bracket can also be added to that, before you calculate how much you save on income tax as a homeowner.