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I'm trying to insure that I understand US tax laws with regard to itemization and mortgage interest, in order to calculate whether to take out a mortgage in order to maximize my 5 year gains with the end goal being FIRE. I have never purchased a home before but I have heard from friends that I am losing out on a tax shelter by not doing so. I pay 19k in rent annually.

I am projecting to earn 188k this year and I expect that to increase by 1-2% per year for the next 5 years, which is the period of time I wish to model in terms of buying vs renting and if the latter, how much to "buy" via a mortgage. I understand that the standard deduction is much higher now due to the tax law changes in 2018. I file single so that the IRS website says the standard deduction for me is $12,200 for 2019. Deductions for state and local taxes are limited by the 2018 law to $10,000, but due to my income, I owe this much in state income tax liability anyway. So, as I understand it, I can itemize and deduct the 10,000 i pay in state income taxes plus whatever interest I pay on a mortgage. Thus, if I take on a mortgage that pays interest of more than $2,200 per year, I would see a reduction in my federal tax liability? Plus I am paying to own the home instead of paying 19k in rent.

Thus, if I buy a home for 400k and put 20% down, I would finance 320k, and at 3.512% on a 15-year fixed, pay almost 50k in interest over the next 5 years. To confirm my understanding, as long as I am able to itemize more than the $12,200, the interest is deductable? Since my state income liability plus property tax on the home would easily exceed the single filers $12,200 standard deduction, I would recieve on average over the 5 years in question, 10k in mortgage interest deduction, correct?

Am I thinking about this correctly?

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    Everything changes over time including standard deductions and tax laws. – tnk479 Jun 29 at 14:19
  • I highly recommend you read How big of a mortgage can I realistically afford? and if that doesn't offer sufficient guidance please try to reword your question. – JoeTaxpayer Jun 29 at 14:32
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    It sounds like you might misunderstand the potential value of the deduction - it is not a dollar for dollar credit, so being able to take a "deduction" only means you effectively get a pennies on the dollar discount on the mortgage cost. See: investopedia.com/articles/mortgages-real-estate/11/… It is generally worth so little that it can be ignored in buy vs rent scenarios, the uncertainty in a 5-year projection easily dwarfs such an over-rated tax treatment. – BrianH Jun 29 at 14:38
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    "I would finance 320k, and according to zillow pay almost 50k in interest and all of that interest is deductible each year?" 50/320 = 15.6%. Something is wrong in your math. – JoeTaxpayer Jun 29 at 17:02
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    @yoozer8 - yes, we need more input from OP. To both our questions. – JoeTaxpayer Jun 29 at 18:41
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I have used the phrase

"Don't let the tax tail wag the investing dog"

and it applies here as well. The tax break means this; your cost of a loan is reduced from 4.5% (that's about the 30 year rate today) to 3.06% (this is the net if you are in the 32% bracket.) Now, we can also discuss whether you are saving to your 401(k), $19,000 limit this year, potentially pushing you into the 24% bracket. It's taxable income over $160,726 that's taxed at 32% for you.

"You should get a house for the tax break" is as misguided as "You should buy Apple stock because I love apples". There are good reasons, and bad. A house has far more cost than the current interest you'll pay. At the very least, there's the property tax, which under the current code is no longer deductible for you (Note: OP already hit his $10K cap). There's insurance. There's ongoing repairs. Last year's new roof was $25K for me. I just got off the phone with an HVAC guy, as my AC just died. It's either a $500 repair or a $12,000 new system. Buying new, what we did, kept these things in the distance, but 20+ flew by.

If you are planning to stay single, don't plan to move in the next 7-10 years, or get married, consider the reasons you want a house. Privacy? Quiet? A yard to garden? Lots of space to entertain? All on the good side of the list. Note also, a marriage and family might mean needing a new house. If so, there's a cost there, and the risk of needing to sell when the market is against you. If that house is perfect, it means you, a single person, lived in a house big enough for 4 all those years.

That's my input for now. Any more details you offer would help others and me give you more precise answers. I'm not anti-buy, as long as it's for the right reason(s).

There are many, many articles, including posts here that discuss the rent vs buy issue. I may revisit and add a few links if I'm waiting for my HVAC guy for a while.....

Update - the refrigerant was not enough to keep the system going. I just contracted for a new system, and since the water heater was 23 years old as well, that, too. $18,000 after rebates from utility companies. (To be clear, a combined AC / Heating system, and new hot water heater). If nothing else, a suggestion that one look at such costs and divide by about 20 years to understand annual expense they might be missing.

New York Times' Buy vs Rent Calculator

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    Sorry to hear about that HVAC repair. Thanks for the well thought out response. – tnk479 Jun 29 at 21:00
  • $640 to top off the refrigerant, an appointment to price a new system. Ballpark is $12K, it's central Heat/AC. Sorry if my post had any tone of "preachy". I think knowledge is power, and best to have as much info from as many people as you can. – JoeTaxpayer Jun 29 at 21:41
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    No worries. Greatly appreciate you sharing your response. – tnk479 Jun 30 at 18:28
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Here's how you determine whether home ownership is financially advantageous to you:

If you aren't having cashflow problems (your mention of considering FIRE makes me think this isn't an issue for you), is ignore the monthly mortgage payment and look only at the costs of owning. Yes, a mortgage payment is more than just the cost of interest, but with excess money in the budget, the principal payment is effectively a real estate investment replacing some other investment.

Your costs will be $10k annually (typical, obviously it starts higher and decreases) in interest on the mortgage, paid with pre-tax dollars, plus post-tax dollars to property tax, insurance (homeowner's as well as windstorm, flood, or whatever applies in your area), routine upkeep (for example lawncare), and amortized maintenance.

Convert to post-tax dollars for simplicity, total it up, and compare the bottom line to your rental costs of $19k (in post-tax dollars) annually.

Don't forget to also consider the non-financial impacts this will have on your life, which JoeTaxpayer delved into.

  • So I gather from the answers that my real problem is figuring out what the better investment is: a home or stocks/bonds. Everything feels inflated right now thanks to the Fed's supression of interest rates. I am faced with the problem of knowing when the music stops. I have been under invested ever since the financial crisis of 2008 and have missed out on the real estate and stock rallies. I save an insane amount of cash because I don't trust financial markets or the Fed. – tnk479 Jun 30 at 18:30

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