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I've read just about anything I can find on comparing cash-flow between owning a house versus renting. One new thing popped into my head yesterday, and I can't shake the feeling that it's an obvious aspect that nobody talks about.

If you want to deduct mortgage interest, then you need to forgo the standard deduction, right? So estimating your tax savings needs to incorporate the loss of the standard deduction, but nobody ever mentions this.

Look at this example: Yahoo! Real Estate - Mortage Interest Tax Savings Calculator (example)

Let's say I finance $300k over 30 years at 4.1%. In the first year I pay about $12k in interest. This calculator assumes that if I'm in the 28% tax bracket, then my tax savings is ($12k * 0.28) ~$3400. This is almost $300 a month, and sounds like a significant savings on my monthly payments.

But if I give up the standard deduction, then my tax liability doesn't drop by $12k, it actually drops by ~$6k (single filer), and my tax savings is more like $1700, which is half as much!

Am I crazy or is this correct?

5

Those choices aren't mutually exclusive. Yes, most discussion of the mortgage interest deduction ignores the fact that for a standard itemizer, much, if not all of this deduction can be lost. For 2011, the std deduction for a single is $5,800. It's not just mortgage interest that's deductible, state income tax, realestate tax, and charitable contributions are among the other deductions. If this house is worth $350K, the property tax is about $5K, and since it's not optional, I'd be inclined to assume that it's the deduction that offsets the std deduction. Most states have an income tax, which tops off the rest. You are welcome to toss this aside as sophistry, but I view it as these other deductions as 'lost' first.

I'm married, and our property tax is more than our standard deduction, so when doing the math, the mortgage is fully deductible, as are our contributions.

In your case, the numbers may play out differently. No state tax? Great, so it's the property tax and deductions you'd add up first and decide on the value the mortgage deduction brings.

Last, I don't have my mortgage for the deduction, I just believe that long term my other investments will exceed, after tax, the cost of that mortgage.

  • 1
    Haha, thanks, you're the same guy that answered my last question! Although none of the calculators I've found even bother to ask if you're itemizing other deductions, I noticed reading through a lot of other Q&As on this site that a lot of the members have mentioned it. This is a great community. – Mark E. Haase Sep 10 '11 at 22:34
  • @mehaase - On behalf of all the members here, thank you, and welcome. – JTP - Apologise to Monica Sep 10 '11 at 23:06
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It's true that the standard deduction makes the numbers less impressive. I ran your scenario through my favorite, most complete rent vs buy calculator, and your math isn't far off.

However, there are a lot of deductions only available if you itemize. Medical expenses, moving expenses, job expenses, charitable contributions, local income/sales taxes, property tax, private mortgage insurance, etc. Property tax on that house alone is going to be nearly equal to the standard deduction, so the point is nearly moot. Anyways, the above linked calculator handles all of those, and more.

  • 2
    +1 That is an EXCELLENT calculator. Thanks for sharing. – Mark E. Haase Sep 10 '11 at 22:40

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