## How to calculate tax benefit of owning a home

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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### How to calculate tax benefit of owning a home

I frequently here people talking about the tax advantages of owning a house. From my situation there is very little tax benefit from owning a home. My mortgage interest, property taxes, and home insurance add up to \$14,000 per year. I am married so the standard deduction that we give up is \$6350x2=\$12,700. Itemizing allowed us to claim charitable donations of \$500. So \$14,000+\$500 - \$12,700 = \$1800. My DW and I keep ourselves in the 15% tax bracket so the tax benefit of owning the house for 2017 is \$1800* 15% = \$270. I own a modest home with \$215k financed @ 4% right now.
The tax benefits are greater for a single person because they only receive one std deduction of \$6350, but even as a single person in the 25% tax bracket it would be \$14,000+\$500 - \$6,350= \$8,150 * 25% = \$2,038

Some rough calculations. If you are filing married and buy a house for less than \$300k with 20% down, you will likely see no tax benefit from owning a house.

Am I missing something? I feel like there are a lot of people mislead that they will benefit a lot from tax deductions by financing a home.

I found a report that showed that the median home price in 2010 was \$221,800 and the average price was \$272,900.

Grt2bOutdoors
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### Re: How to calculate tax benefit of owning a home

What tax benefit?

Your mortgage costs you 4%, you are in the 15% tax bracket. So, the government is giving you 15 cents back on every dollar you borrow. All it is really is an incentive, but a benefit? The one who is benefiting is the lender who's cost of capital is much much lower than the rate they are charging you.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

BogleMelon
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### Re: How to calculate tax benefit of owning a home

Grt2bOutdoors wrote:What tax benefit?
If you compare owning financing a home Vs living in the street buying cash, then you are right there is no tax benefit. If you are comparing financing a home Vs renting then yes, there is a tax benefit of financing over renting.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

bloom2708
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### Re: How to calculate tax benefit of owning a home

Grt2bOutdoors wrote:What tax benefit?

Your mortgage costs you 4%, you are in the 15% tax bracket. So, the government is giving you 15 cents back on every dollar you borrow. All it is really is an incentive, but a benefit? The one who is benefiting is the lender who's cost of capital is much much lower than the rate they are charging you.
Even worse. Only 15% or 25% of \$1,800 (The amount over the standard deduction of \$12,700).

The benefit of a house is a place to live/eat/sleep/relax/stay warm or cool. In a house you are usually a bit further from your neighbors. Renting a house, renting a condo, renting an apartment, renting a room are other places to live.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend your time here! | 3. You have no control <--spend no time here!

Grt2bOutdoors
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### Re: How to calculate tax benefit of owning a home

BogleMelon wrote:
Grt2bOutdoors wrote:What tax benefit?
If you compare owning a home Vs living in the street, then you are right there is no tax benefit. If you are comparing owning a home Vs renting then yes, there is a tax benefit of owning over renting.
AMT offsets any such benefit - what is given is taken away.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

bigred77
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### Re: How to calculate tax benefit of owning a home

You are right. Many married households living in non-HCOL areas don't see any tax advantages for owning their home.

Higher income and/or HCOL married households can see some benefits.

It's quite the marketing tool for people who make their living in and around residential real estate however.

bigred77
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### Re: How to calculate tax benefit of owning a home

Grt2bOutdoors wrote:
BogleMelon wrote:
Grt2bOutdoors wrote:What tax benefit?
If you compare owning a home Vs living in the street, then you are right there is no tax benefit. If you are comparing owning a home Vs renting then yes, there is a tax benefit of owning over renting.
AMT offsets any such benefit - what is given is taken away.
I don't understand the conversation here.

If I'm a married household and we finance a 200k home and property taxes are 2% our standard deduction is far higher than itemizing. Our tax bill is exactly the same if we buy and live in the house or if we rent an apartment or if we live on the streets. Federal income tax bill remains unchanged.

Mlm
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### Re: How to calculate tax benefit of owning a home

Do you pay high State income taxes? High state income and property taxes alone put me at twice the standard allowance even without mortgage interest.

s0me0nesmind1
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### Re: How to calculate tax benefit of owning a home

Depends on a number of a factors.

1) If you're itemizing you will also get a deduction on state income taxes or state sales taxes. That's a decent chunk you can add on.

2) It doesn't just depend on if you are HCOL, but also what state you live. If you live in a state with high property taxes, obviously that's an advantage from a tax deduction perspective.

That said, me and DW live waaaay below our means, to the point where our yearly gross income is more than our property is worth. At the end of the year we don't even come close to surpassing the standard deduction, so believe me when I say we share your pain

Not trying to bring politics into this, but that is one thing I can stand by the current administration with is making a higher standard deduction and eliminating most standard itemized deductions.

delamer
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### Re: How to calculate tax benefit of owning a home

As with much in personal finance, this differs widely by individual/family.

We have a highish income tax rate in our state and live in a HCOL area within the state. So real estate is pricey with lots of interest being on mortgages, plus the property taxes (which are actually on the moderate side).

So between mortgage interest, property taxes, and state income tax, it has always benefited us to itemize. You really can't look at one deduction; it is a package.

dodecahedron
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### Re: How to calculate tax benefit of owning a home

alaskantraveler wrote:I frequently here people talking about the tax advantages of owning a house. From my situation there is very little tax benefit from owning a home. My mortgage interest, property taxes, and home insurance add up to \$14,000 per year. I am married so the standard deduction that we give up is \$6350x2=\$12,700. Itemizing allowed us to claim charitable donations of \$500. So \$14,000+\$500 - \$12,700 = \$1800.
Home insurance is NOT deductible so your itemized deductions are even smaller than you calculated above.

(If you were referring to mortgage insurance (PMI) rather than homeowners' insurance, that at least used to be deductible, but even that deduction expired at the end of 2016.)

dodecahedron
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### Re: How to calculate tax benefit of owning a home

alaskantraveler wrote: Some rough calculations. If you are filing married and buy a house for less than \$300k with 20% down, you will likely see no tax benefit from owning a house.

Am I missing something?
Yes, you are missing the fact that some folks have a substantial amount of other deductions, usually S/L taxes but could also be charitable donations or unreimbursed employee expenses or large medical expenses (e.g., because they are paying for nongroup individual insurance policies with high deductibles), on top of which to stack their home ownership deductions.

More generally, as others have said, this varies all over the map. In a state with high state/local income taxes, many higher income folks will already exceed the standard deduction simply with those taxes and so they will get the full benefit of being able to deduct all their mortgage interest and property taxes at the margin.

On the other hand, I see many low and moderate income taxpayers each year who get little or no tax benefit from home ownership, despite the astonishingly high property taxes in this neck of the woods (some of the highest in the country). This is particularly true for the elderly, who may have paid off their mortgages and who also get a higher standard deduction for being over 65.

MoonOrb
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### Re: How to calculate tax benefit of owning a home

Shouldn't the tax benefits also include the exemption from capital gains taxes on sale of a home in which you've been living?

FWIW I think some people overstate the significance of the mortgage interest deduction, though.

IMO
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### Re: How to calculate tax benefit of owning a home

You're not missing the fact that the interest deduction for many people is lower than their standard deduction or not much above it. As other's have said, you can also include charitable deductions, property taxes, state income taxes or sales tax (https://www.irs.gov/individuals/sales-t ... calculator). There are other deductions, but often they are limited by your income level, and may not have any benefit.

In your case it's not much help, in other's it can be a definitive help when it comes time to file your taxes.

I also think whenever someone mentions paying off their mortgage, people are quick to presume that their effective mortgage interest is lower due to the ability to itemize. You can sometimes save in both mortgage interest paid, and now get more effective use of taking the standard deduction.

Everyone's particular situation is unique on the tax savings or lack of savings.

And as someone just noted, when it comes time to sell, if you have significant appreciation, that's can be a significant tax advantage.

jimb_fromATL
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### Re: How to calculate tax benefit of owning a home

alaskantraveler wrote:I frequently here people talking about the tax advantages of owning a house. From my situation there is very little tax benefit from owning a home. My mortgage interest, property taxes, and home insurance add up to \$14,000 per year. I am married so the standard deduction that we give up is \$6350x2=\$12,700. Itemizing allowed us to claim charitable donations of \$500. So \$14,000+\$500 - \$12,700 = \$1800. My DW and I keep ourselves in the 15% tax bracket so the tax benefit of owning the house for 2017 is \$1800* 15% = \$270. I own a modest home with \$215k financed @ 4% right now.
The tax benefits are greater for a single person because they only receive one std deduction of \$6350, but even as a single person in the 25% tax bracket it would be \$14,000+\$500 - \$6,350= \$8,150 * 25% = \$2,038

Some rough calculations. If you are filing married and buy a house for less than \$300k with 20% down, you will likely see no tax benefit from owning a house.

Am I missing something? I feel like there are a lot of people mislead that they will benefit a lot from tax deductions by financing a home.

I found a report that showed that the median home price in 2010 was \$221,800 and the average price was \$272,900.
You're right on. The mortgage tax advantage is a near-myth for the majority of folks. Depending on the area of the country, according to several studies only about one out of every three or four taxpayers exceeds the standard deduction and gets any tax savings from year to year. Ironically, it's so misunderstood that many surveys also show that a much larger percentage of voters are opposed to eliminating the mortgage deduction than there are people who actually get the tax deduction.

Then for a lot of folks it's like your case, where the savings in only for the amount by which the combination of mortgage interest plus property taxes cause you to exceed the standard deduction.

There are other advantages to owning a home -- if you're likely to be in the area for a long enough time for the initial costs of the initial purchase and future sale to be amortized to a reasonable amount. It's just that tax savings ain't one of 'em for the majority of folks with normal income living in normal cost-of-housing areas.

When all things have normalized after a crash or bubble in the market the cost of renting a comparable home will be about the same or a little more than it costs to make the mortgage payment and pay the taxes, insurance, maintenance and repairs, HOA fees, etc. Otherwise there would not be much incentive for landlords to go to the hassle and risk of owning the properties to rent out.

So ... when you're buying the home yourself with a mortgage, you're building net worth in the form of reducing your debt as you pay off the original principal balance. Plus you get leveraging of your "investment" because you're getting appreciation as a percentage of the full value of the home even though you actually have perhaps 20% or less of the home's value tied up in the initial purchase. And you may be one of those 3 or 4 who gets some savings in taxes too.

On the other hand as a tenant, you'll pay about the same for a comparable home, but you will not get any equity or appreciation. Instead you'll be the OPM of Other Peoples' Money fame -- providing the OP to build wealth and equity and provide better tax advantages for the landlord.

By the way, you haven't necessarily lost anything if you must sell a home before it appreciates enough to make up for the closing costs. It's not a loss unless you've paid more out of pocket to live in it than you would have had to pay in rent for a comparable place for the same length of time.

jimb

stoptothink
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### Re: How to calculate tax benefit of owning a home

jimb_fromATL wrote:
alaskantraveler wrote:I frequently here people talking about the tax advantages of owning a house. From my situation there is very little tax benefit from owning a home. My mortgage interest, property taxes, and home insurance add up to \$14,000 per year. I am married so the standard deduction that we give up is \$6350x2=\$12,700. Itemizing allowed us to claim charitable donations of \$500. So \$14,000+\$500 - \$12,700 = \$1800. My DW and I keep ourselves in the 15% tax bracket so the tax benefit of owning the house for 2017 is \$1800* 15% = \$270. I own a modest home with \$215k financed @ 4% right now.
The tax benefits are greater for a single person because they only receive one std deduction of \$6350, but even as a single person in the 25% tax bracket it would be \$14,000+\$500 - \$6,350= \$8,150 * 25% = \$2,038

Some rough calculations. If you are filing married and buy a house for less than \$300k with 20% down, you will likely see no tax benefit from owning a house.

Am I missing something? I feel like there are a lot of people mislead that they will benefit a lot from tax deductions by financing a home.

I found a report that showed that the median home price in 2010 was \$221,800 and the average price was \$272,900.
You're right on. The mortgage tax advantage is a near-myth for the majority of folks. Depending on the area of the country, according to several studies only about one out of every three or four taxpayers exceeds the standard deduction and gets any tax savings from year to year. Ironically, it's so misunderstood that many surveys also show that a much larger percentage of voters are opposed to eliminating the mortgage deduction than there are people who actually get the tax deduction.
+1. The studies I've read suggest that significantly less than half of homeowners benefit from the mortgage deduction, yet you talk to prospective homeowners and it is always brought up and most people are against eliminating it. More than anything, I think it is simply a way for a lot of homeowners to rationalize (in their mind) buying more home than they probably should or buying when renting might be a better option. There are so many myths about home ownership that are deeply ingrained. Another homeowner who gets no tax benefit from home ownership (and it isn't even remotely close in our situation).

avalpert
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### Re: How to calculate tax benefit of owning a home

BogleMelon wrote:
Grt2bOutdoors wrote:What tax benefit?
If you compare owning financing a home Vs living in the street buying cash, then you are right there is no tax benefit. If you are comparing financing a home Vs renting then yes, there is a tax benefit of financing over renting.
No there isn't. The tax deduction is still just a modest reduction in the cost of financing - it is not an inherent benefit of doing so.

Nate79
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### Re: How to calculate tax benefit of owning a home

Our home represented a significant tax deduction when itemizing thanks to other itemized deductions (significant state tax, gifts, etc).

The mortgage interest + real estate tax was almost fully deductible thanks to all the itemized deductions that we would have had regardless of the house.

Jags4186
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### Re: How to calculate tax benefit of owning a home

It's a goldilocks benefit. If you buy too modest or too expensive of a house you don't see the advantage.

Let me give you an idea of how owning a home would help someone like me:

Hypothetical situation

Married filing jointly 25% tax bracket:

\$500,000 property, \$400,000 30yr mortgage at 3.75% -- Year 1 interest: \$14,880

\$12,000 in property taxes/yr

\$14,880 + \$12,000 = \$26,880 in housing expenses - \$12,800 in standard deduction * .25 = \$3,520 in tax breaks

\$293/mo is nothing to sneeze at. Plus I'd get to itemize about \$4000 in state income tax which means another \$1000 so now we're at \$376/mo in tax savings.

My hypothetical \$3000/mo payment is now a net \$2625/mo.

avalpert
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### Re: How to calculate tax benefit of owning a home

jimb_fromATL wrote: On the other hand as a tenant, you'll pay about the same for a comparable home, but you will not get any equity or appreciation. Instead you'll be the OPM of Other Peoples' Money fame -- providing the OP to build wealth and equity and provide better tax advantages for the landlord.
That is an assumption that needs to be demonstrated independently in every circumstance - there is nothing in the laws of physics or economics that guarantees the renter is paying the same as the buyer. In many markets renting is cheaper, sometime much cheaper, than buying.

jimb_fromATL
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### Re: How to calculate tax benefit of owning a home

avalpert wrote:
jimb_fromATL wrote: On the other hand as a tenant, you'll pay about the same for a comparable home, but you will not get any equity or appreciation. Instead you'll be the OPM of Other Peoples' Money fame -- providing the OP to build wealth and equity and provide better tax advantages for the landlord.
That is an assumption that needs to be demonstrated independently in every circumstance - there is nothing in the laws of physics or economics that guarantees the renter is paying the same as the buyer. In many markets renting is cheaper, sometime much cheaper, than buying.
Like I said ..." When all things have normalized after a crash or bubble in the market..."
...
"... Otherwise there would not be much incentive for landlords to go to the hassle and risk of owning the properties to rent out..."

jimb

avalpert
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### Re: How to calculate tax benefit of owning a home

jimb_fromATL wrote:
avalpert wrote:
jimb_fromATL wrote: On the other hand as a tenant, you'll pay about the same for a comparable home, but you will not get any equity or appreciation. Instead you'll be the OPM of Other Peoples' Money fame -- providing the OP to build wealth and equity and provide better tax advantages for the landlord.
That is an assumption that needs to be demonstrated independently in every circumstance - there is nothing in the laws of physics or economics that guarantees the renter is paying the same as the buyer. In many markets renting is cheaper, sometime much cheaper, than buying.
Like I said ..." When all things have normalized after a crash or bubble in the market..."
...
"... Otherwise there would not be much incentive for landlords to go to the hassle and risk of owning the properties to rent out..."

jimb
Except it isn't some normal equilibrium that is reached outside of a bubble, it is a continuously moving market - just because a landlord enters the market with the intent of making a profit doesn't guarantee him one. In fact, having financing costs are one of those great illustrations of why you shouldn't expect to necessarily recoup your costs - why as a landlord should I expect to be able to charge enough rent to pay my financing costs if another landlord can buy the same property without financing, thus having lower costs and being able to charge lower rent.

Minot
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### Re: How to calculate tax benefit of owning a home

You may be interested in this New York Times article on the societal effects of the mortgage interest deduction.

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### Re: How to calculate tax benefit of owning a home

Minot wrote:You may be interested in this New York Times article on the societal effects of the mortgage interest deduction.

I think this paragraph sums it up pretty well, "There is another reason most MID benefits accrue to the top, even among homeowners: You have to itemize your deductions to claim it. Most taxpayers don’t bother because they don’t make enough money to justify the hassle. In 2014, 1.5 million households earning between \$40,000 and \$50,000 a year claimed the MID, receiving an average benefit of \$14 a month. That same year, 6.5 million households with earnings above \$200,000 claimed the MID and enjoyed an average benefit of \$391 a month. What this means in aggregate is that households with at least six-figure incomes receive more than four-fifths of the total value of mortgage interest and property-tax deductions."

There is one argument to the size of the MID nation wide. In the article it states that the number is around \$96 billion per year. The thing it doesn't consider is how much in std deductions were given up in order to itemize in order to take advantage of the MID. In my case I claimed approx. \$9000 in the MID, but I gave up \$12,600 between my DW and me to get it.

Ultimately this tax credit helps out higher income families the most who would likely be home owners anyway.

JGoneRiding
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### Re: How to calculate tax benefit of owning a home

BogleMelon wrote:
Grt2bOutdoors wrote:What tax benefit?
If you compare owning financing a home Vs living in the street buying cash, then you are right there is no tax benefit. If you are comparing financing a home Vs renting then yes, there is a tax benefit of financing over renting.
A very small benefit for a very small segment of the population. This is why it comes up all the time to get rid of it when they talk about tax reform. Personally I think Real Estate agents benefit the most--from hyping it.

AllenSmith
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### Re: How to calculate tax benefit of owning a home

bberris
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### Re: How to calculate tax benefit of owning a home

You are mainly discussing the tax benefits of a house note. The real tax benefits come to a buyer who pays cash. Now you still take the standard deduction, but you get the tax free return of rent that you would have paid. So if your \$300,000 house would rent for 2,000 a month, you earn 8 % tax free. Another way to look at it, if you invested 300,000, and paid 2,000 rent, you would be paying taxes on the income earned on the 300,000. Let's say 7 % return, with a 15 % tax rate, or about \$3,000 in tax savings.

basspond
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### Re: How to calculate tax benefit of owning a home

Principal payment + ((interest payment + taxes) * tax rate) + appreciation - rent - maintenance expenses - (home insurance - renters insurance) = benefit

kmok
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### Re: How to calculate tax benefit of owning a home

The real tax advantages are imputed rent and Home Sale Tax Exclusion. Mortgage interest tax deduction is not really a tax advantage.

Imputed rent: Let's say you're renting an apartment for \$2,000 a month. To your landlord, your rent checks are considered income, and he/she pays tax on it. You don't pay that tax if you live in your own house.

Home Sales Tax Exclusion: tax-free appreciation upon sale.

Mortgage interest tax deduction: If you have interest income, you pay tax, so if you have interest expense, it is normal that you get a tax deduction. However, everybody gets a freebie call standard deduction, if you are not getting the full interest expense deduction on top of your freebie standard deduction, you are losing out rather than getting a tax advantage.

CrystalBull
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### Re: How to calculate tax benefit of owning a home

The Crystalbull True Mortgage Cost Calculator has been updated using 2016 tax figures:

https://www.crystalbull.com/True-Mortga ... alculator/

It does not account for every tax situation, but should get you close.

Thesaints
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### Re: How to calculate tax benefit of owning a home

There is a big advantage in itemizing property taxes vs. paying for rent.
Plus there is the tax exclusion, if one is planning to move.
Mortgage interest deduction is just a rebate on the mirrgage rate; I consider it a lesser advantage. It would be the same if interests were non-deductible and rates were lower.

However, all these advantages are certainly more advantageous for those making more money, living in a State with high income taxes, in an area with high RE prices. NYC/SF/LA, for the sake of brevity.

TravelforFun
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### Re: How to calculate tax benefit of owning a home

Mortgage interest deduction doesn't benefit a lot of taxpayers but realtors and bankers love it.

jimb_fromATL
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### Re: How to calculate tax benefit of owning a home

TravelforFun wrote:Mortgage interest deduction doesn't benefit a lot of taxpayers but realtors and bankers love it.
...and they push it so well that in a Gallup poll a few years ago 60% of Americans were opposed to eliminating the mortgage tax deduction even though only 25% of taxpayers get any benefit from it at all.

jimb

GAAP
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### Re: How to calculate tax benefit of owning a home

The tax advantages are a great way to convince people to buy houses that they can't afford...

The NPV on the tax savings is unlikely to make much real difference unless you're buying a multi-million dollar house --even then, it's not likely to be significant to you, given the income you would need to get the mortgage in the first place.

I recently ran some numbers as part of another planning exercise. With a \$320K mortgage, 1.5% property taxes (assumed 2% annual growth), in the 25% bracket, the tax benefits only lasted about half of a 30-year mortgage. Shorter term mortgages would show even less benefit.

Dottie57
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### Re: How to calculate tax benefit of owning a home

IMO wrote:You're not missing the fact that the interest deduction for many people is lower than their standard deduction or not much above it. As other's have said, you can also include charitable deductions, property taxes, state income taxes or sales tax (https://www.irs.gov/individuals/sales-t ... calculator). There are other deductions, but often they are limited by your income level, and may not have any benefit.

In your case it's not much help, in other's it can be a definitive help when it comes time to file your taxes.

I also think whenever someone mentions paying off their mortgage, people are quick to presume that their effective mortgage interest is lower due to the ability to itemize. You can sometimes save in both mortgage interest paid, and now get more effective use of taking the standard deduction.

Everyone's particular situation is unique on the tax savings or lack of savings.

And as someone just noted, when it comes time to sell, if you have significant appreciation, that's can be a significant tax advantage.

My mortgage was at 10% refinanced down to 8%. I worked hard to pay it off so I would stop paying that high interest. My first loan papers showed i would pay about \$210,000 total on a 30 yr loan amount of \$76000.