Real Estate – Should I buy a house to save on my taxes

She is 30, making a high income and worried about paying too much in taxes. During our conversation, she mentions, “I thought I’d buy a house to save on my taxes, is that a good idea?”

Realtors and mortgage loan officers will be the first to tell you, “You can write off the mortgage interest.” What I am about to say may make my mortgage and realtor friends upset, but it’s only accurate for a small number of people. In fact, most people cannot write off their mortgage interest.

Why the Confusion

Taxes are complex. Most people know the terms, but little about the mechanics of how they work. Yes, you can deduct your mortgage interest, but only if you itemize.

What is a deduction? A deduction is an expense that lowers your taxable income; if you make $50,000 and have $20,000 in deductions, you’re only going to pay tax on $30,000 of your income.

Itemizing vs. The Standard Deduction

You have to itemize your taxes to receive a deduction for your mortgage interest, but most people do not itemize. In 2016 only 30% of tax filers itemized their deductions. Very few people itemize because they do not have enough deductions to surpass the standard deduction.

When you itemize, you add up all your qualifying expenses; such as mortgage interest, medical bills, and charitable contributions. You are then allowed to choose between taking your total itemized deductions, or the standard deduction. The standard deduction is a set dollar amount you can deduct regardless of your actual expenses.

In 2016 the standard deduction was $6,300 if you were single or $12,600 if you were married. You should always choose the greater of the standard deduction or your itemized deductions. For my family, and 59% of other families in the US, we did not have enough itemized deductions to exceed the standard deduction.

(If you are paying attention to numbers, you may have noticed I said 30% of people itemize and 59% did not. That only adds up to 89%. There is another 11% of people that are offered special deduction treatment due to disabilities.)

I expect, once we learn statistics from 2018, only 15-20% of Americans will itemize due to tax law changes. The standard deduction is now $12,000 for a single filer and $24,000 for married couples. With this higher standard limit, the hurdle will be higher to clear, and even fewer people will benefit from the mortgage interest deduction.

What if I do itemize?

If you are one of the few that itemize, it still doesn’t make sense to have a mortgage just for the tax break. First, you are only saving on taxes for the deductions above the standard deduction. So if a married couple has $30,000 in deductions, only $6,000 of those deductions makes an impact on their tax bill.

Second, you only save taxes. Many people think you save $1 in taxes for every $1 in mortgage interest. This assumption is not correct. If the married couple above pays 30% on their taxes, the $6,000 in extra deductions would only save them $1,800. Is it worth paying $6,000 to save $1,800?

There are plenty of reasons to buy a house, but the mortgage interest deduction is clearly not one of them. Especially since you probably will not even use it.