If one opts to buy a home with a mortgage, how does it reduce taxes and which taxes? I.e. income tax, capital gains?

Is it always a good idea to purchase a home with a mortgage vs. paying in cash with respect to taxes?

  • 5
    Where in the world are you? Taxes are different in different places.
    – Vicky
    Dec 23 '21 at 15:51

Yes, interest on a mortgage is deductible from your income, but only if you itemize deductions, which many do not. For many people, it's better to take the standard deduction unless you have a very large mortgage (paying more in interest than the standard deduction) or have other deductible expenses like state and local taxes (which are currently capped at $10,000), charitable deductions, or medical payments (not counting insurance premiums).

But in order to get that deduction you have to pay interest. I've always held to the principle that it's dumb to spend a dollar to save 30 cents. So it's never a good idea to get a mortgage vs paying in cash with respect to taxes. There can be other reasons why you would get a mortgage, but taxes isn't one of them.

  • 3
    That's only the case in the US
    – Hilmar
    Dec 23 '21 at 23:30
  • Thank you D Stanley and gaefan for your answers. They both are helpful. Too bad the question is closed due to super strict rules and get in the way. I'd give both of you a check that you answer the question in a helpful way and not get bogged down if the question needs "details or clarity" Dec 26 '21 at 8:08
  • "There can be other reasons why you would get a mortgage, but taxes isn't one of them." if you are allowed to, can you elaborate when it makes sense to get a mortgage if it's not for tax purposes? Dec 26 '21 at 8:10
  • 1
    @user1422331 Add a location tag (I assumed you were talking about the US) and that should be enough to get the question reopened.
    – D Stanley
    Dec 27 '21 at 15:29
  • Some will get a mortgage at low rates, and use the cash to invest instead. While mathematically it looks like a no-brainer, that's a level of risk (paying for risky investments with a risk-free loan) that most should not entertain.
    – D Stanley
    Dec 27 '21 at 15:31

This answer assumes you are in the United States.

There are two main tax benefits:

  • Mortgage loan interest is deductible on your income tax
  • Capital gains exemption when you sell your house

These two are not unlimited but they are quite generous.

If you buy your home with cash, then you can't take advantage of the first one. Though if you have enough cash to buy your home outright, then your income might be high enough that you get less of an income tax deduction (because of the alternative minimum tax).

  • 1
    Even if you're not affected by the Alternative Minimum Tax, mathematically speaking it is still better to not have a mortgage at all if you have the cash. What's better than deducting your interest payments come tax time? Not making interest payments in the first place. Dec 23 '21 at 14:18
  • @AxiomaticNexus It's not mathematically better if a greater rate of return is achieved through taking a mortgage instead of tying up a pile of cash in a house. The math on which is better requires consideration for what can be done with the money that's not used to buy a house.
    – Hart CO
    Dec 23 '21 at 15:24
  • @Hart CO True, but that's outside the scope of this question. The question is very explicitly about tax benefits of a mortgage, and nothing more. So, the point still stands, if you have the cash to pay for a house in full, taking out a mortgage for the mortgage interest tax deduction makes absolutely no sense mathematically. Dec 23 '21 at 18:24
  • 1
    The capital gains exemption does not depend on having a mortgage, it's worth pointing out.
    – Craig W
    Dec 23 '21 at 19:03
  • @AxiomaticNexus That response doesn't track for me. You say "the question is very explicitly about tax benefits of a mortgage, nothing more" then say that not paying interest is better than paying less tax. The cost of a tax benefit is always relevant in a discussion about tax benefits.
    – Hart CO
    Dec 23 '21 at 19:03

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