> If you own you’re paying mortgage interest and real estate taxes and both are tax deductible
Side note - As I understand it, you cannot deduct either of those if you take the common standard deduction. In high cost of living places I am told that these deductions do outweigh the standard deduction.
> If you have a mortgage, you can deduct the interest. I think most people are in this category
That's true, but you need to have other deductions or a fairly large mortgage for it to be worth taking that deduction instead of the standard deduction. Most people are better off with the standard deduction.
> There's a lot of tax advantages that you get by owning a home as well.
If adding together mortgage interest paid for 12 months + property taxes paid for the year together is less than the $12k single filer standard deduction, are there any tax benefits to owning a home?
> I also learned recently that the realtor lobby has fought hard to keep the mortgage interest tax deduction which helps home owning persons but hurts everyone else.
> Why am I able to use my single rental as a tax shelter?
The tax deduction is only available on your primary and secondary residences. (Where secondary here refers to a second home, not a third, etc.) You don't get to claim a primary or secondary residence mortgage interest deduction on your rental properties, because you aren't living there.
This arose out of a previous law that generally allowed for the deduction if interest on all loans because it was administratively unfeasible to differentiate between business and personal interest expense (or so said the wisdom at the time). Even today, business interest expenses are generally deductible. This is wholly separate from the mortgage interest deduction, which is for owner-occupied homes.
> Is it not also the case that interest payments on a residential mortgage are tax deductible in the US?
They are only if you itemize your taxes nowadays. During the Trump administration the tax law changed so that the vast majority of Americans now take the Standard Deduction. I received the mortgage interest deduction for about 15 years but haven’t received it for 5-6 years now.
> middle class: I make money on my mortgage. I see my 1.22% 20 years fixed mortgage melt away against a salary that is raising with inflation. Plus I get rewarded by government with a tax deduction. Similar story for our rental.
The mortgage interest tax deduction only applies if you itemize, which literally 90% of people do not do as of 2019 IRS statistics. Effectively, there is no mortgage interest tax deduction for middle class since the 2017 tax cut ACA jobs act.
>I have to subtract from that about 3% for interest, 2.5% in property tax, 1% for maintenance.
... but then you'll also probably (if you're like the average HN poster who isn't taking the standard deduction) deduct your mortgage interest and your property taxes, and you'll be exempt from up to $500,000 in capital gain if married, filing jointly, and using the home as your principle residence.
>> The government lets you deduct your mortgage interest from taxes
>
> This is effectively not true anymore.
Care to explain? Is this because the standard deduction is so high, it's generally not worth itemizing for most people since the Trump tax system adjustment? Genuinely curious; I'm a current renter, hopefully purchasing in the next couple of years. But this is an important part of the buying calculus.
People say this but do they know what it means? It's not like the "woooo, free money!" people make it out to be. You are spending a lot of money and saving a little bit of money. It's only a very significant decrease in taxes if you pay a real lot in interest and have high property and income tax.
In my experience buying a house saved me only about a whopping $500 in taxes the first year. And you better fucking believe that $500 went right back into the house in the form of maintenance and upkeep.
Furthermore,
You don't get the mortgage interest deduction if you don't itemize and take the standard deduction instead. Due to new tax laws the standard deduction after 2017 is so high it will be taken by 97% (IIRC) of Americans. So mortgage interest deduction is totally irrelevant from 2018 on.
One of my biggest concerns with putting the vast majority of my wealth in my house is a lack of asset diversion and if it causes you to negligent the tax advantages of contributing to retirement account. ESPECIALLY when your in your 20s, that's when compound interest work most of it's magic.
> all the tax affordances related to owning real estate vs. equities
The only ones I can think of are depreciation (analogous to capital loss harvesting), 1031 exchanges (loosely analogous to step-up basis; this is the biggest difference) and opportunity zones (analogous to QSBS).
If you borrow against your equities, you can deduct the interest paid on that. That mortgage-interest deductions are bigger is a function of the lending being federally guaranteed more than tax law.
> I'm not saying it's the same as the non-tax-deductible rent paid by renters,
With the standard deduction being as high as it is, most people don’t pay enough in interest to itemize to take advantage of the mortgage interest deduction.
While no politician would dare touch the mortgage interest deduction, most progressive economists think that it is hand out to the rich and we should get rid of it.
While the Trump era tax cuts and increasing the standard deduction didn’t get rid of the mortgage deduction, it was one thing that was right about the law.
I think you're referring to the tax credit for mortgage interest payments?
If so ... this subsidy ironically only applies to those carrying the largest mortgages. During the Trump administration, the standard deduction was doubled, which means that (a) many, many people who used to itemize (and thus include mortgage interest payments) would no longer do so (b) this deduction somewhat levelled the playing field between median renters and median mortgage holders.
To have enough mortgage interest payments that you can itemize deductions implies a very substantial mortgage. $500,000 @ 4% only gets you to $20k of mortgage interest in a year, not enough (by itself) to make you itemize.
> 1. What about the property tax deduction? Why are property taxes deductible, but income taxes are not?
There's no objective reason why it should be. But since deductions are largely arbitrary policy instruments anyway - because property tax deduction encourages and makes easier home ownership (at least this is the theory) and the government wants more home ownership. State tax deduction does not really have such goal (unless you see moving people to high-tax states as a goal, but I don't think federal government identifies such goal).
> 2. How do you feel about the mortgage interest deduction? A very similar question could be asked.
Same as above. Only much bigger - given 20% down mortgages, mortgage interest - especially for new mortgages on standard equal-payment plan - is very substantial. So, tax deduction makes owning home easier - and, on the reverse, removing this deduction would seriously hurt current mortgage owners and discourage new ones.
The difference here is that with property-related taxes there is a policy goal linked to it, and also long-term choice individuals make based on this policy, which would make them very upset if the policy changes. With state taxes, there's no real policy goal (for federal government at least) and most people don't choose state to live it because of state tax deduction.
> So, you're telling me that the $1MM home (which will be roughly $5600/mth) will give you nearly $20k in tax deductions
Something like that.
Federally, local property taxes and mortgage interest on the first $1 million of principle for first and second mortgages for your primary residence are deductible from your income. For California, the rules are slightly different, but I think that they are close enough to use the same rules for estimation purposes.
Using the interest rates from your example that would be a deduction of 4.5% * $800k + 6.5% * $100k = $39.7k for the mortgage interest deduction and roughly $12.5k for the property tax deduction for a total deduction of $52.2k. If you can afford a million dollar house, you are probably in either the 28% bracket or the 33% bracket for federal taxes and in the 9.3% bracket for California taxes so that will save you $14.6k-$17.2k on federal taxes and $4.9k on California taxes.
Side note - As I understand it, you cannot deduct either of those if you take the common standard deduction. In high cost of living places I am told that these deductions do outweigh the standard deduction.
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