Simplifying Mortgage Interest Tax Deductions

By: Cathy Strini


This week we wanted to delve into the murky world of taxes and provide a little insight into how buying a home vs. renting could save you money! Take a look at current interest rates:

mortgage rates.png

To put it simply, this graph is showing us that mortgage rates are near record lows after the 2008 financial crisis – making homeownership  attractive because it decreases the amount you, as a buyer, pay on your loan. Furthermore, interest paid on a mortgage is tax deductible if itemized on the tax return.

The combination of these two factors means that buying in the current market is more beneficial than renting.

However, there is often a lot of confusion surrounding writing off tax savings from mortgage interests. This money-saving perk is often not factored into the “pro side” of purchasing a home. It is easy to solely compare your monthly rent to your monthly mortgage payments when deciding which option makes sense financially…BUT that does not give you the complete, long-term picture. If done correctly, writing off your mortgage interest could save you a large sum of money  – making up more than the difference between paying rent and making a mortgage payment!  As stated by the  Law Dictionary :”In California, the state revenue service’s Mortgage Interest Tax Deduction allowance is equal to the federal government’s  allowance. In other words, taxpayers in California can effectively double the size of their annual mortgage-related deductions.”

There are a few basic requirements that are good to know  when it comes to determining how much of your mortgage interest will (or will not) qualify for the deduction.

First of all, according to Fox Business, you can “only deduct mortgage interest if the loan is a secured debt that has been recorded and your home is the collateral”.  Next, the home must be either your primary or secondary residence.  Also, the proceeds from the loan must be applied towards the principal debt incurred in acquiring or improving the property.

It is important to remember that each situation is different! Here a few tips/tools that are useful for calculating your unique circumstance:

1. Remember, the standard deduction amount is based on your tax filing status. Know your tax bracket (the rate at which an individual is taxed). Tax brackets are determined based on income levels. The chart below is a great one to reference – accurate and easy to read.

taxbrackets (2).png

2.    Calculate the potential tax savings generated by your mortgage interest here.  While this calculator offers a reliable estimation, it should not be construed as sound tax advice. Always seek additional sources of information!

3. If you are filing your taxes in California, be sure to  include a copy of your itemized federal deduction sheet with your state tax return.

4. Using  Rent Vs. Buy comparison calculator can provide you with a more detailed, personalized financial comparison of renting vs. buying over a specific amount of time.

Another factor that is hard to quantify is equity. As a renter, you are essentially paying your landlord’s mortgage or adding equity to his or her bank account. However, when you are paying off your own home mortgage, you increase your degree of ownership in your home with every payment. A general rule is that if you are staying in your home for at least five to seven years, the cost of buying the house is more likely to be bypassed by accrued equity and increased home value. *

<< While we wrote this article in the hopes of assisting and educating our readers, we always encourage you to consult an accountant in order to best maximize your profits and tax savings. 🙂 >>




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