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If I Buy a House, How Much Money Will I Really Save at Tax Time?

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By : Andy Asbury    99 or more times read
There are many good reasons to buy a home, and there are many good reasons to rent. I work as a dual REALTOR® and residential leasing agent, which naturally keeps me attuned to the pros and cons of both.

One common reason given for buying a home is that you will save money at tax time. But is this really true, and if so, how much?

The underpinning of tax-savings for American home buyers is the mortgage interest deduction. This program is quite different than the tax credits issued intermittently to buyers from 2008 to the time present. The tax credits-if the timing worked in your favor-translated into dollar-for-dollar tax rebates of amounts up to $8,000.00! The most recent wave of incentives have passed. Participating buyers were required to close on the homes by September 1.

In great contrast, the American government has offered the mortgage interest deduction program since 1913!

Technically, yet importantly, the tax deduction would be more accurately called an "income deduction" used in the context of calculating your taxable income. As a home owner, each year you deduct the interest paid to your lender from your adjusted gross income. This results in a proportionally-though not dollar for dollar-lower tax obligation.

If you are considering becoming a home owner, and if all other factors in your decision are equal, I might suggest setting January 1 as a target date for closing on your new home. The timing can affect any home buyer, but I have noticed it is particularly relevant for my more entry-level or lower income buyers.

Why: If you currently rent your home, this can mean that unless you have children or other additional dependents, you have little incentive to itemize deductions because the standard deduction is already so high. In many cases this is true even if you give money to charitable organizations generously!

For example, in 2009, the standard deduction for a married person filing jointly was $11,400.00; or $5,700.00 for a single person. If you have already been approved for a loan, ask your lender to calculate how much interest you will pay during the first calendar year. It is possible the amount will be very close to the standard deduction. This creates a kind of "race" in a calendar year for your mortgage interest payments to surpass the standard deduction mark. To the frustration of some buyers, buying in the middle of the year can mean the paid interest becomes more of a wash against the standard deduction. True, you can also deduct property taxes and mortgage insurance; but my point is that if you are buying a home anyway, you will want to avail yourself of all opportunities as soon as possible!

The tax deduction or income deduction should not be construed as a driving reason to buy a home. However, as an ancillary or supporting factor, it really makes great sense! It is a wonderful reward for investing in your community and in your home.
Andy Asbury is a Twin Cities-based REALTOR® and welcomes comments to this article. Andy specializes inMinneapolis condos helping home buyers get closer to the rewards of urban life. The Asbury Group has a full team ofMinneapolis realtors serving first-time buyers throughout the metropolitan region.

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