How Home Ownership Could Lower Your Tax Bill

Many homebuyers and potential homebuyers know that there can be tax benefits to owning a home versus renting one. So it might be helpful to break this down to see exactly what the savings are. Always check with your tax professional for information on your specific situation.

For this example, we’ll use a married couple that makes a combined income of $50,000 per year and is renting an apartment for $1,400 per month. The couple is looking to purchase a home for $175,000 and has 3.5% to put down on a Federal Housing Administration loan.

The payment on a 30-year mortgage at 5.5%, including mortgage insurance and taxes, is $975. Municipal taxes and property insurance bring the total up to $1,402 per month.

The taxes on the property are $300 per month, or $3,600 per year. The mortgage interest that the couple would pay for the first year comes out to $9,392.88. They now have $12,992.88 worth of deductions toward their tax returns. We’ll leave out mortgage insurance for this example.

Our couple, making $50,000 gross per year without other deductions, is in the 15% tax bracket. This means that if the couple were still renting, before other deductions they would pay $7,500 ($50,000 x 15%).

Now, with the $12,992.88 home ownership benefit, their taxable income is $37,007. At the 15% tax bracket, the new income tax due is $5,551.07.

This is a savings of $1,948.93 ($7,500 – $5,551.07) over the course of a year. This comes out to $162.41 per month.