Let’s talk about everything you want to know about tax savings when buying a home.
This is one of the most interesting things for me to talk about, because when I talk to first time home buyers, “Wow!” is always the response that I get. You know, a lot of people figure out their budget based on what they’re currently spending as a renter when buying a house. But the reality is, there’s a little bit more going on.
Imagine you’re paying $3,000 a month right now in rent. Well, what if you knew by owning a home and replacing that with a home mortgage you could bring home another $500 a month? What would you do? Would you buy a home?
In the video, we given an example on a whiteboard about how to unpack the tax advantages of buying a home. The first step is to understand how are we taxed?
Let’s say you are a renter making $100,000. You’re not actually taxed on that full $100,000. You have some exemptions. Things like your 401K contribution, or medical expenses, and some other little one-offs. In this scenario, let’s just use $15,000 for your 401K and $2500 for all the other stuff. So that $100,000 income as a renter, you’re actually taxed as though you make $82,500.
Now the cool part. Let’s say you’re a homeowner. You get to write off the mortgage interest that’s part of your mortgage payment.
Not only that, the property taxes that are associated with the property. So in this case that same person that used to rent and was taxed at $82,500, well now they get to write off, let’s say $16,000 of mortgage interest, and $4,000 of property taxes. So now, it drops all the way to $62,500.
To give you an example, in a 25 percent tax bracket, that’s a $5,000 credit, or $400 a month that makes its way back into your paychecks. Now, taxes are a little bit more complicated than that and you can’t just assume you’re going to get that full $5,000. You have things like maybe this year you’re making more money than you made last year. Maybe you got married or maybe you’re combining incomes. All of those things make taxes a little bit more tricky, which is why we always recommend you talk to your CPA.
Now, we just talked about the power of buying a house and what that does to your tax position. What about when you sell the house? Every other investment out there, when you make money upon the sale, you pay a tax. They call that capital gains tax. Well, when you live in a house two out of the last five years, there’s actually an exemption for $250,000 for a single person and $500,000 for a married couple.
Now, obviously this isn’t everything about taxes, but it’s two pretty important things that can make the difference between just getting a house and getting the right house that sets you up for an awesome future!