Follow up to Rent vs Buy

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.

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About nickseevers

A Sacramento, CA Real Estate Agent at Triple Crown Realty who loves college football and politics.
This entry was posted in Buyer, Real Estate, Tips. Bookmark the permalink.

3 Responses to Follow up to Rent vs Buy

  1. chris trieu says:

    great blog. you need to hire an asian or jew accountant and have a proper ‘failing business front’ to launder or clean the money back into your household. you laid it out very clearly

  2. sax5084 says:

    I’ve been claiming 0 deductions since I started working. The only full year I didn’t own a house I got back about $1000 from the feds and $200 from California (of course I was able to amend the 2008 return to get the $8000 tax credit on top of that when I bought in 2009, but that’s a different story). On 2009’s return I got back about $4600 from the fed and $1100 from the state, and this year I’m getting back $5000 from the feds and $2000 from the state.

    I’m not sure how it came to this, but I got to deduct about $11,000 in interest, $6000 in property tax (I staggered it to pay 1.5 years worth last year since I’m getting married this year), all of my CA state income tax, about $1000 of donations, 3 vehicle registration fees for about $500, and a personal exemption of $3650.

    The biggest difference is that my standard deduction would have been half of yours, but people with no house are also missing out on deductions they could have claimed but didn’t because they didn’t exceed the standard deduction amount (donations and car registration fees in my case), and also property tax, which you didn’t mention. Anyway, just goes to show that you could get $50 to $500 a month more back on your tax return. Then again, I suppose if you subtract the $6000 I paid in property taxes from my refund I’m back to square 1 as well, unless you consider the fact that my mortgage payment is less than my rent was when I was in a place that was half as big in a much worse neighborhood.

    • nickseevers says:

      Cory a lot of your return has to do with your income. I don’t know how much you make, but I’m assuming (and honestly really hoping) you make more then $30,000 (like in my example). Beyond that, your home cost more then $177,000 (again an assumption).

      However, I did forget about the state income tax and the car registration. Cory you are likely a person who is much better tax wise for buying a house, now stop claiming 0 and claim 1 or 2 and get paid more each pay check 🙂

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