1 Tax Break Homeowners Think They Get But Actually Don’t

Here's why buying a home won't save you money on your taxes.

Mar 1, 2014 at 1:00PM


Source: James Thompson.

Tax law has historically favored real estate owners. Its importance can't be dismissed -- an entire real estate boom came about in the 1980s just from one simple change in the IRS code.

Yet, despite the supposed benefits of owning your own home, taxes are, for most people, a nonstarter. Few people actually benefit from owning their home like they believe they do.

How you've been mislead
It's common that real estate agents and bankers alike suggest homeowners can save on their taxes by owning their own home. Yet, the vast majority of homeowners derive little or no tax benefit at all.

The IRS allows homeowners to deduct mortgage interest from their taxes. It's fairly straightforward: You can deduct the interest paid on up to $1 million of housing debt from your income.

Thus, if you earned $70,000 and paid $5,000 in mortgage interest, you would only pay taxes as if you had earned $65,000. Assuming your last dollar is taxed at 25%, you would avoid $1,250 in taxes, essentially paying only $3,750 in interest.

Not as simple as you might think
The math behind the mortgage interest tax deduction checks out. Reality, however, is very different from a basic example.

One thing most homeowners miss is that you receive an automatic "standard deduction" of $6,100 for singles and $12,200 for married couples filing jointly in 2013. This is a deduction you get automatically, whether your name is "Jim" or "Jamie," or you own a home or you're homeless. It's yours just for being part of the great United States of America.

Since you receive the standard deduction anyway, owning a home saves you money only if your total deductions exceed the standard deduction. Here are two examples:

A single person who pays $5,000 in mortgage interest and who has no other deductions would not benefit from the mortgage interest tax deduction. He or she would receive a standard deduction of $6,100 regardless of their homeownership status.

Likewise, a couple who pays $8,000 in mortgage interest and who claims $3,000 in additional deductions would not benefit from mortgage interest tax deductions, either. They could take the standard deduction of $12,200 vs. $11,000 in itemized deductions.

A tax break for the wealthy
The mortgage interest tax deduction is a tax break for the wealthy, not middle America. A couple who buys a $1 million dollar home would have roughly $44,669 in deductible interest in their first year. A couple who buys a $250,000 home would have $11,167 in deductible interest.

Assuming no other deductions, the wealthier couple will avoid taxes on $32,470 of income in excess of the standard deduction. The middle class family will receive no tax break at all, as their mortgage interest does not exceed the standard deduction.

Before you buy a home on the premise of avoiding Uncle Sam, do the math. Consider what your non-mortgage deductions are, and then see if the tax deduction would truly save you money. Most homeowners save little, if anything, on their tax bill by buying a home. 

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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