Suze Orman TwitterSuze Orman FacebookSuze Orman YouTubeSuze Orman LinkedIn
View Blog & News List

A Taxing Reason to Not Buy a Home

June 30, 2016 at 12:00 AM

There are two potentially large tax breaks that come with buying a home. But listen to me: I never think it is a good idea to factor in the tax breaks when deciding if you are ready to buy your first home. Nor do I ever want anyone to decide on a mortgage budget based on the after-tax net cost. Here’s why:

The Breaks May Not Be Worth More than Your Standard Deduction. The annual interest you pay on a mortgage and your property tax can be claimed as a tax deduction only if you file a federal return with itemized deductions. And it only makes sense to itemize if the total of all your deductions will be more than the standard deduction everyone can claim. (You must choose between the standard deduction or itemizing.)

In addition to your mortgage and property tax, other big-ticket payments that can be claimed as an itemized deduction include state and local income tax payments (or state sales tax paid) and charitable contributions.

In 2016 the standard deduction for a married couple is $12,600. Given today’s low interest rates, chances are you are not generating gobs of interest payments. For example, a $200,000 mortgage financed with a 30-year fixed rate loan charging 3.75% interest will generate a total of less than $7,500 in interest in the first year. (Interest payments are highest in year one, and then decline every subsequent year.) Property tax rates vary widely, but if you live in a state (and county) where the combined levy is around 1%, that would add another $2,000. You’re still not near the $12,600 standard deduction.

That said, if you live in a state with high property taxes, and/or a steep state income tax, and you are very charitable, itemizing could indeed pay off for couples.

For single filers the standard deduction in 2016 is $6,300. Clearly, that lower threshold tilts the odds that itemizing may be the way to go. But keep reading. I still don’t want you to factor the value of your itemized deductions into your home-buying decision.

Only Buy a Home That You Can Afford Without Tax Breaks. Please avoid the temptation to talk yourself into a more expensive home on the theory that the money you “save” by reducing your tax bill, effectively reduces the cost of owning that home. While that is technically correct, it’s nonetheless a dangerous way to over-reach.

For starters, it’s important to understand that your monthly mortgage has two main components: principal and interest. In the early years of a mortgage the bulk of your payment is indeed (deductible) interest. But over time, more of your payment is the principal. And there’s no tax break on principal payments. For example, using the same example as above, when you hit the 10th year of repaying a $200,000 mortgage at 3.75%. your total interest payments will fall below $6,000. Meanwhile, 10 years from now the standard deduction will be even higher, as it is adjusted periodically to keep pace with inflation. Put those two factors together and you can see that for married couples especially, the value of the mortgage interest deduction dramatically declines over time.

Moreover, whenever I hear people talking about the net cost after factoring in the tax break I know they are buying too much house. If you need to justify the cost based on tax breaks-one of which is not permanent-you’re asking for trouble.

If you do decide to itemize, here’s how I want you to think about your home-related tax breaks: as bonuses that help reduce your tax burden. Great to have, but not central to determining your housing budget.

Tag Cloud

Baby Boomersuniversal college accesskid borrow firstCredit Card Rate Increaselower premiumcar leasinghealthy aging co-sign traditional vs roth 401(k)big results waive home inspection bidhousing marketwould you decline a bonusStock Investmentsonly refinance if it payscommissionsSuze is my biggest mentorteach your child good money habitsFederal Funds RateSpendingteens and moneyburn out2017 Taxesbuy homeinsurance mistakelower ratelow-cost index mutual fundadvice for college graduatesloan is giftteach importance of helping othersdental discount planSchool of Social Workbetter termsstandard ratenew carYoung Adult home related tax break bonus lower overall drug coststudent loan debtStudent Debtunder 18 financial giftbuy down no fee transferfinancing car workaholichome buying seasoncost of capitalization calculatorschedule vacationalways use all paid time offpush yourself to save more for retirementmortgage disclosurePay Off Debt Before RetirementMoneydon't do five year car loanlow down paymentdangerous money seasonPrime Rate Increasedon't ignore open enrollmentmarriage inequalityiffy incomethree year car loansetup automatic savings withdrawmaintain standard of livingmax employee matchChanging Lives2015 record year car salesFinancial SystemBankruptcyMass Mutualpay 100% cashcontribute household expenses retirement accountsadd teencnbc alarm clockTeachpublic service career student loan repayment marriage financial responsibilitySelfishcommunity banktoo expensive schoolback-to-school budgetlive below your meansCiti Simplicity Card paid vacationprotect and provide for minor child percentage of women widowed 75-84ultimate compounding giftCPI-Wterm insuranceAARP Social security calculator8 month emergency fundunsubsidized Stafford loanhigher monthly paymentHDHP/HSAprotect dependent Invest for savings growthengaged in financesvalue moneyoverspend on nights outinsuranceFHA loan feesWarner Bros Television Groupno apologySuze approvedsecured cardForeclosureAdequate Auto and Home Insurancegrandparent IRA contribution Money Marketstandard deduction Fiscal Responsibilityincrease retirement savingspremium3 bucket approachNewtownARM Cautionwomen outlive menbest loan deal HolidaySatisfyingAshley Springeris it necessary?student loan repayment estimatorcompare monthly expensesinterest on student loansMotherWillbest interest of investor8 Rulesoverspend on giftsgrandchild summer job IRA contributionraise insurance deductibleshorter payback periodincrease retirement contribution ratedebtSave Us Money4 Must Have Documents speak new goalallowanceshort term goal mortgage interest tax deductionautomatic paymentfile taxes quicklyignore 6 month grace period 740 credit scorecommit30 year mortgage RichFinancial Power of AttorneyHSA tax savingssummer job match income store credit cardsmobile appHow To Build Credit3 savings buckets couple financesInterestrepay student loanspoint cost offset by savingsno sneaking in feesdream schoolGay Couplesat worst still pay 75% benefitloan big picture 2016 adjust withholdingplandangerous retirement planmortgage brokerCD'sLTCi ASAPsavingslower interest ratecredit reportbad decisionscontribution pay more than minimumemergency fund savingsbuying car 2016long-term care premiumsallowance taskfraudulent returnSuze Orman Scholarshipchildren's bookreal estate marketdental savings planloan necessitycut monthly cellular billinsurance yearly reviewSandy Hook Promisehealthy gumsalternative FICO scoreresponsibleno retirement funds for down paymentconfident of solutionsmall changes employer funding HSAhigh down paymentcut monthly cable bill15-year refinance dealzero rate transfer dealssocial security not going brokeRetirement Savingsraising interest ratespresident ObamaTelepicturesstretch out haircut appointmentsconfidentworst financial mistakeearn allowanceFederal PLUS loantax refund fraudchildren under 18adjust allocations interest capitalizationone annual feeCommunication Skills Banklife insurancemax employer matched 401(k) contributionFree Debt EliminatorFinancial Advicefull retirement ageCredit scoreapproved medical 100% tax-freelousy investmentMust Have DocumentsPBS SpecialETF's20 to 25 times annual incomemental healthsocial security never insolventgraduationCory Bookerhome buying budget!00% tuition paidno splurge Financial Solutions For Youprofessional advisorLegal Guardian10 year repayment plan Forbes3% debt transferred initial tax break Wall Street19 years cash flow problemEmployer Matched ContributionStaffords this year have a fixed 6.8% interest ratedon't blow tax refundFederal ReserveMarlo Thomasincrease emergency savingsCollege of Veterinary MedicineFICO at least 720Holiday ShoppingThe Suze Orman ShowUS Tax Codequick closingincreased auto insurance premiumdebt freeAmericans don't use all paid vacation timeHDHP'sGiftfile asapprovider of financial supportdoctors in networkidentity fraudraise deductiblesraising mortgage rates financial argumentsRevocable Living TrustGiftsEric Dodge Auto Savings meet monthly referrals learn good financial choicesHDHP's are good for youpositivestudent loan repayment plancredit managementGraceautomatic withdraw to savings multiple lenderspay high rate off firstNew York LifeFinancial Educatorprotect loved ones employer offered life insurancerequire chore in exchange for allowanceconsider roth 401(k)reduce withholdingFundssuccessexercise reguarlySandy Hook Elementary Schoolaccelerate dental workARMjanuary billsloan no longer than 36monthsnot gender specific overspend on dining outnear historic lowsIRA contribution gifted money401(k) Contributionscan you afford itcostly insurance mistake2015 financial roadmapHigh FICO Score = Better Rateitemized deductiondoctor no longer in networkearn more on savingspay credit debt ASAProlloverBeautypercentage men widowed 75-84Alarm ClockPrime Rate Rise 2015raise your deductibleDurable Power of Attorney for Health Careemergency fund bill paying prioritieshigher insurance deductibleAccuQuote.comno interest15 year mortgage20% down paymenthealthy retirement weightRoth 401(k)sidelinedeight month living expense same sex marriage band end FloridaInfluentialsno tax on withdrawlsrent vs buyAmy Lacyetmoney-aware childphysical healthverify retirement plan with HR or plan sponsorhome buying mistakesgay marriage ban end Florida gift grandchild IRA contributionderailed planautomate student loan paymentsletter to suze50 over 50One Wallet At A Timeborrow each year, capitalization is going to pile up manage student loansmax benefit coveredfour steps to retirement savings WashingtonSuze OrmanConventional loan PMIRetirement Incomeaffordabilitypaid in fullescrowritual schedulestudentstrained relationshipresponsible with moneyeliminate credit card debtFICO ScoreLong Term Care Insurance buying a carback door Roth IRAopen enrollment review Student LoanAARPproperty taxlong term carerefinanceJose Rodrigueztitle insurancedon't defer interest paymentspreexisting condition not coveredgift not loanlong term goalno life insurance financially irresponsiblemake saving a pleasureForbes Top 10savings pleasuresuitabledon't use allowance as bribelower mortgage interestFinancial40% toward financial goalsame-sex marriageswitch to spouse coverageStudent Debt Crisisreduce interest ratecompare provider pricingLTC shoppingtelevision hosttake actiondental insurance Federal Stafford loanbe good exampleborrowing plan Long Term Care shoppingbreakdown projected monthly housing costbetter loan ratescalculate dependents annual income needshealthy retirement blood pressuredear suzeface your financial fearbe true to yourselfCNBCfiduciaryrefundaffordable premiumdon't buy wantsmonthly dental insurance premiumcar buying mistakesno late fee don't extend mortgage community collegeBill and Pennypay down student loan debtretirment savingssocial workHearthigh premiumspay off debtFinancial Cliffspring summer anticipated salaryhigh credit score discountInflation Benefitcar loanpowerful2016 adjust estimated taxpermanent life insuranceprotect your familyavoid burn outcomparison shoppingMinor Children focus on new truth peace of mindUniversity of IllinoisCredit Card Interest Ratehigh deductible health care plancostly legal home ownershipclosing disclosure20% equityget health insuranceroth irahealthy teethcredit unionwrite new goallowest cost fund optionfinancial concern8 month safety netadult childrenpay down car loanmortgagewives should be involved in retirementstaycationcredit cardbad retirement planningdon't derail retirement savingsCombo Insurance Productssocial securityis it true? holiday spendingpurely financial standpointidentity theftunexpected expenseteensschool Long Term Care premiumsdebit cardtaxesrequired disclosureterm life insurancehome budget after tax costhighest possible benefitshop online guaranteed level term policyDeath Benefitreplace permanent life insurance with termclosing feesEasy Life Insurance GoodbyeCOLAmonthly benefit not enough life insurancenon conventional routeGay Rightsdepreciating asset women live longerpaying for collegeLifestyleonly offered while employed High Credit Scoreannual cost of living adjustmentlong-term care save special saving accounthealthy youloved ones dependent on incomebudgetFinal Goodbyesave money3 step financial road mapreal estate mistakesUrbana-Champaignno waiting periodclosing costs 2% of loanOverspendingPost-Divorceretain separate credit cardsfinancial fearsPersonal Financejuggle multiple financial goalsage appropriate chorefinancial goal phraseFinancial Awarenesskeep a scheduleretirementget the most out of social security gift up to 14,000secure creditcredit utilization rateFICO credit score credit card mortgageMortgage Credit Availability Indexemotional stakesSuze Orman's Money Warshigh FICO scorefinancial aidcollege graduateCivil RightsSuze changed my lifeget credit cardSwap Older Annuities or Life Insurance verify wellness screening and programsdon't charge a pennyorigination feesget over life insurance phobiawomen long term careLTCbest interest ratesbalance transfer HDHP's are not badkids schedule paymentsbecome member don't spend reduce monthly paymentrising home pricesdeath benefit needs for familyfocus on needsRevocable TrustExhibitionprescription tierage appropriate goalsMost Influential Celebrities Listknow before you owelow credit scorecollege studentswitch to roth 401(k)no negativityMoney-Savingovercome financial fearslife insurance name trust as beneficiaryUniversity of Florida20 year level term Influential Celebrityenjoy saving pay interest while in schoolNew american Dream student loan repaymentFRAone credit carddo you need life insurancetax ID theftmoney vowsHDHP 10% donate to charityHoliday SeasonEmergency Savingslet them have 50% controlfamily save at least $100 monthlyis it kind?low mileage discountstay positiveVital Documentsfinancial independencePhyllis Shelton expert long-term carebetter loan dealsno private loanswomen longer life spanfederal student loan deferment do not pay allowance for good behavior401Kcreate new truthincentives for health care wellness screeningpublic service loan forgiveness programno private loanFixed Rate MortgageLoveretirement plannegotiate points with bank or sellerFinancial Awareness Video Festivalis it necessarySuze Orman spouse Kathy TravisSelectQuote.comcharges on credit cardCommencementdon't cover cosmetic dentistrybe kind to yourselfvalentines dayleave a legacyVeterinary Schoolyours, mine & oursFinancial Gift Cliff20% down payment avoid feesbuy home you can affordhome loan credit score below 740 heartache6 month waiting perioddeath benefit 20 to 25 times annual incomehome insurance

View Blog & News List
People First. Then Money. Then Things.
Connect with me on Facebook Connect with me on YouTube Connect with me on Twitter
© 2017 Suze Orman Media Inc. All rights reserved.
 |  Search  |  Sitemap  |  Privacy  |  Terms
Sign Up For E-mail Offers
Open Panel
Close Panel