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What A Difference 

A Deduction Makes

Rent vs. Own

  Is the federal income tax mortgage interest deduction really a useful tool by which the government can promote homeownership? Homebuyers, particularly those on the verge of making the transition from renting to owning, but also those in the trade-up market, frequently seek information about how the mortgage deduction actually works.

  The information presented below gives an easily understood example of what a big difference that deduction does make. The chart--which is for general illustration purposes only because individual circumstances vary--was prepared by The Gooder Group Inc., a company based in Fairfax, Virginia, that produces prospecting brochures. 

How the Mortgage Interest Deduction Helps Homebuyers:

  John and Jane have a combined income of $50,000 a year. They purchased a home for $150,000, putting 10% down and financing the remaining $135,000 with a 30-year, 10% mortgage. Their monthly principal and interest payments amount to $1,185 a month. Here's how the value of tax deductions will save them cash in their first year and years to come. (Figures are for illustration only).

  Their income is $50,000 

Itemized Deductions:
  State income tax(6%)$400 as renters & $400 as buyers
  Contributions 0 as renters & $13,470 as buyers 
  Interest points 0 as renters & $13,470 as buyers
  Points (3) 0 as renters & $4,050 as buyers
  Real estate taxes 0 as renters & $1,800 as buyers

Total Itemized Deductions:
  $ 2,900 as renters & $21,420 as buyers
  Deduction used: $5,200 as renters & $21,420 as buyers
  Exemptions (2): $4,000 as renters & $4,000 as buyers
  Taxable Income:$40,800 as renters & $24,580 as buyers
  Federal Income Taxes would be:
     $7,401 AS RENTERS & $3,687 AS BUYERS 

Tax Savings: 
  Federal Income tax savings would be $3,714
  State Income tax savings would be $800

Total Tax Savings 1st year as a buyer -- $4,514 
Annual Savings thereafter as an owner -- $3,700

Charlotte Laws, Ph.D.
16810 Ventura Blvd.
Encino, CA 91436
(818) 346-5280 Direct
(818) 386-4861 Pager

Charlotte@YourTopBroker.com

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