In addition, existing tax laws allow homeowners to itemize and deduct the mortgage interest and property taxes from their taxable income. For example, compare the tax implications for two households both earning $63,430 a year, the minimum income required to purchase the statewide median-priced home of $301,430.* The household that purchases the home with a 20 percent downpayment and finances the mortgage at the current rate of 4.62 percent will receive a tax deduction of over $14,000 in the first year of ownership. The renter household will most likely utilize the IRS Standard deduction of $11,400, $2,600 less than their homeowner counterparts. The homebuyer reduces their total tax liability by $400 compared to the renter in the first year of ownership. Accounting for the out-of-pocket savings as well as the tax savings, the homebuyer saves over $3,000 in their first year of ownership.Other resources you may find useful:
NY Times Interactive Rent versus Buy calculator:
Bankrate.com’s questionnaire for potential homebuyers on whether or not to buy a home:
The National Association of REALTORS® resources for clients on renting versus buying:
1. Underlying assumptions for the Mortgage Interest Deduction and Property Tax (1 percent of the purchase price) deduction are based on the Traditional HAI Q4-2010 assumptions of: The prevailing median price in the 4th quarter 2010 (Median Price $301,430), effective FRM interest rate of 4.62%, a 20% downpayment, and a $241,144 loan amount.
2. Incomes are based on the underlying assumptions for the Traditional HAI. The same income is used for both Renters and Buyers and is assumed to be the Minimum Qualifying Income needed to purchase a median priced home in the 4th quarter 2010.
3. Tax rate based on 2010 IRS Schedule Y-1 Married Filing Jointly in 15% tax bracket (latest available from the IRS) assuming no changes over the 5 year horizon
4. Interest deduction based on the Traditional HAI Q4-2010 underlying effective FRM interest rate
of 4.62%, a 20% downpayment, and a $241,144 loan amount.
5. Property taxes are assumed to be constant over this 5 year analysis, thereby assuming the underlying market value remains unchanged. If the home value were to increase, under Proposition 13, the property tax assessment would increase at a rate of 2 percent per year. Along these same lines, income is also assumed to be constant over this 5 year analysis in order to keep the analysis simple and determine the basic 5 -year tax benefit of buying a home in 2010.
Market Data: CALIFORNIA ASSOCIATION OF REALTORS®