As a follow up to my previous blog post, I just finished my taxes for the tax year 2010. It led me to think about the tax break we get for owning a home. Not to mention this article I was sent from the National Association of Realtors. I will give you some details of why the tax break may not be that great of a deal for everyone.
The home we live in is owned by my wife (Kim) and my brother (Evan). Kim and I, as a married couple, receive a standard deduction of $11,400. We purchased our home in July of 2009 for $177,000 with an FHA loan, our total loan amount ended up being around $173,000. We made all the payments in 2009 and 2010. We had an interest rate of 5.75% through these two years (we have since refinanced down to 4.25%).
The point of me telling you all of this is that for 2010 we paid approximately $9,900 in interest which is deductible for our income tax. However, as a married couple our deduction is already $11,400. So this deduction does us no good, my brother on the other hand as a half owner can claim all of the mortgage interest as a tax write off. So his standard deduction is $5,700, so with the interest on our home of $9,900. This knocks his income down $9,900, he then also gets to claim his exemption of $3,650. Thus his taxable income will be $13,500 less then his adjusted gross income.
I do not know how much my brother makes, but I will use a nice round number to demonstrate how this deduction works for him.
Let’s say his income is $30,000
With the interest deduction of $9,900 and exemption of $3,650, leaving him a TAXABLE INCOME of $16,450. This leaves his tax to be paid at $2,045.
Now without the interest deduction, we’ll use the standard deduction. Standard deduction of $5,700 and exemption of $3,650 is $9,350. Take that number from the adjusted gross income leaves his TAXABLE INCOME of $20,650. That makes his tax $2,675.
This is a difference of $640 that a single person who owns a home and makes $30,000 a year can save by owning a home. While this is not a whole lot of money, it works out to about $50 a month. Not to mention as the article above points out, when selling a home that is used as a primary residence a single person can profit $250,000 or a married couple can profit $500,000 with out any tax consequences.
I do not claim to be a tax expert, so please consult a tax expert before filing taxes based on the information provided here. (I certainly hope this does not need to be said, but figured I’d throw it out there.)
If you have any questions regarding buying a home or some of the tax benefits feel free to contact me.