Will I Really Get a Tax Break When I Buy a Home?


The answer, usually, is no. If you understand how taxes work and get the basics in this article, you will see how for the average American family purchasing a home, there is $0 in tax savings in owning a home. That means that from a strictly income taxes standpoint, there are no additional benefits as a result of buying a personal residence. Singles may get some tax savings, but it is usually a very small amount, if anything. But let’s look at what a married couple could expect in terms of tax breaks from buying a home because they are the most likely to make the jump to homeownership.

First, let’s define the average American family for the purpose of this article. We'll assume that they file their tax returns as married filing jointly (MFJ) and that they purchased an average, 2011-priced house of about $200,000. We will estimate that house has a $180,000 mortgage at 5.0% interest – so they pay $9,000 in interest expense per year – and pay property taxes of something in the range of $2,000 per year on that house.

Note: Taxes will vary based on your income, your filing status, your allowed deductions, whether or not you have to pay the Alternative Minimum Tax, etc. This article is an illustration that will probably applies to a majority of Americans, but talk to a tax professional with specific questions related to your own tax situation.

To understand why the mortgage interest deduction is worthless to you, we first must understand the basics on the IRS 1040 Form that you file each year, as well as the IRS 1040 Schedule A form that you may file.

The 1040 Form.

Refer to Column A of the chart below. The taxes you pay are a function of your salary. For example, $75,000 less your allowed Standard Deduction of $11,600 (or Itemized Deduction if that's higher), less your allowed exemption of $3,700 (1 exemption for 1 child) will make your Net Taxable Income $59,700. Use that number to figure out the taxes you owe, based on the IRS Tax Tables and you'll find that you will pay $8,121 in taxes for MFJ.

On the above chart, look at the “Standard Deduction or Itemized Deduction” line item. The IRS gives each MFJ taxpayer a standard deduction each year so that people do not have to spend time itemizing lots of smaller allowed deductions, especially if the total of those are lower than the Standard Deduction. This helps to explain why the mortgage interest deduction is worthless to the average American.

If your allowed Itemized Deductions – which you would list on schedule A and sum them to determine your total Itemized Deductions ( they would include mortgage interest and property taxes, among other items) – are not greater than your allowed Standard Deduction, you'll just end up using the Standard Deduction the IRS already gives you, which was $11,600 in 2011 for MFJ. In other words, if your combined mortgage interest and property taxes are not above that $11,600 – and they are $9,000 + $2,000 for the example above, totaling $11,000 — you'll use the standard deduction. This means that the taxes you owe do not change as a result of owning real estate. And since your taxes are not changing, as is the case for many Americans who can buy a house at the average home price sale noted above, the mortgage interest deduction is worthless because it does not make a difference at all.

To restate it: The IRS gives you a “standard” tax deduction that most people use. Only if your total Schedule A deductions, like a combined mortgage interest and property taxes, are above the “standard” deduction would you “itemize” your deductions. The average American family who owns a home do not go above the standard, and even if they do, it's typically not by very much. Hence, most people will encounter no tax benefits for owning a home.

But who does get tax benefits from owning a home? Usually, those who buy much more expensive homes with much larger interest deductions and property tax deductions may be able to get a tax break for their purchase. But for those of you in the $200,000 house price range, don't expect any such thing.