Q. People say that when you start making a lot of money, you should buy a house to help with taxes. Is this true? Does it really help that much? -- Mark
A. Oh, yes, a house can definitely cut your taxes. Home ownership comes with lots of financial advantages. Instead of putting money into a landlord's pocket, you are building up equity in real estate. After a few years, your mortgage payments will probably be lower than rent for comparable space, and the interest you pay on the mortgage usually blows the standard deduction out of the water. All of these factors can make buying a home one of the best financial decisions you'll ever make.
Let's look more closely at the mortgage interest deduction since that's the most concrete advantage. In the early years, most of a mortgage payment is interest. Even in the tenth year, the payment is still 75% interest. All of that interest is tax deductible, as are your property taxes. If your deductible mortgages expenses, state and local taxes, charitable contributions, and other deductible expenses exceed the standard deduction of $4,400 for singles ($7,350 for married couples), you get to itemize your deductions. If you are in the 28% tax bracket and can beat your standard deduction by $10,000, you will save $2,800 in federal income taxes and probably reduce your state taxes, too.
But I wouldn't buy a house for financial reasons alone. Houses don't travel well if you decide to work on another coast, and they are notoriously needy. Along with the house, you get a lawn to mow, the occasional frozen pipe, and toilets to repair. Home ownership has been known to arouse strong urges to immerse oneself in wallpaper books. And don't even get me started on paint chips! Houses require furniture, drapes, and new roofs, and your friends will probably buy you a dog.
Are you ready for all that?
Buying a house is a lifestyle choice as well as a financial one. Of course, you can buy a town house or a condo and keep some of the advantages of apartment life, but they frequently don't appreciate as much as a single-family house. Financially, single-family homes are your best bet. Often, the best buys are in the suburbs. Are you a suburb person?
You sound young and single. There's another way to reduce your taxes that pays off big down the road. Max out your 401(k) or whatever tax-deferred options are available to you, and start a Roth IRA as well. Build up a nice nest egg before you buy your nest, then you can slack off (some) when the needy house, kids, dogs, roofs, furnaces, and lawn-care companies start demanding cash.
I don't mean to discourage you from buying. It could be perfect for you. I just don't think buying versus renting is as simple as plugging in some numbers in a "Am I better off renting?" calculator (though it's a good place to start). Give some serious thought to lifestyle issues before you buy. You might really enjoy mowing lawns and agonizing over Coconut versus Snow Drift for your porch railing.
Ann Coleman lives in a town house with a 4 x 10 foot yard (no grass) in suburban Virginia. Stocks she owns are listed in her personal profile. The Motley Fool is investors writing for investors.
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