Bob Northern & Company
12540 Patterson Ave
Richmond, VA 23238
Tel: 804-708-9463 • Fax: 804-708-9467
Home Ownership vs. Renting
Can we save money on our taxes if we buy our own home?

What’s the scoop on Tax Savings?

Is it true we can save money on our taxes if we buy our own home?
How much?

I'm sure you've been told that buying your home has great tax benefits. Most people don't understand how to harness the tax advantage of buying their home to help them buy a home they never thought they could afford.

Let me give you a true scenario.

Jack and Sue live in an apartment. Together they have a taxable income of $48,000 after itemizing their deductions. They have two children and have reasonably good credit. When we're talking, they tell me that they're paying $800 per month in rent right now. They're looking at homes in the $122,000 price range so they can keep their monthly payment including taxes and insurance in the $1,000.00 range.

They also tell me they really like a home they saw in their friend's neighborhood, listed for $143,000 but know they can't afford it at this time. The price of the home is about $21,000 more than the price range they are considering. The additional $21,000 in sales price equates to about $147.00 per month in principal and interest payments than what they feel they can afford. As I speak to them I can see that the home they are talking about is the home of their dreams. In their minds, and other agents have agreed with them, that their "dream home" will have to be their "move up home". They are resigned to the fact that their "dream home" will be one they can afford only after they purchase one of the current homes they are considering.

During my conversation with Jack and Sue, I asked them how much rent could they afford if their present apartment rent went up from the $800.00 per month they are paying now. Their answer is they can afford $1,000.00 per month and maintain their lifestyle with no major inconveniences. That's why they decided to keep their purchase price in the low $120,000 price range because that payment would be about $1,000.00 per month including taxes and insurance.

I asked Jack and Sue if they would buy their dream home right now if I could arrange for their payment not to exceed the $1,000.00 payment they are willing to pay. Of course they had to say they would! After they dared to dream just for a split second they came back to reality and they reiterated quickly that they could not afford the additional $147.00 per month! That amount would put them over their monthly budget!

At that point I showed them the following:
The federal taxes they paid last year on their $48,000 income was $8,507.00 based on them filing an itemized joint married return.
I reminded them that the interest paid on their new home is tax deductible.
Interest payments on their dream home's loan of $143,000 at 7.5% would be a little less than $10,725 in first year interests deductions.
If they deduct the $10,725 from their previous itemized tax deductions for the previous year, their federal taxes would have been based on $37,275 adjusted income rather than the $48,000.
A federal tax based on an income of $37,275 is $5,591.00 rather than the $8,507.00 they paid.
The difference in savings of the two taxable incomes is $2,916.00 annual savings, or about $243.00 per month.
Their response was that they knew that their taxes would go down. But they were unable to wait until April 15th in order to get the $2,916.00 tax rebate check in the mail! They had a family to raise and a budget to meet and they didn't want to starve to death before April 15th waiting for their refund check to show up!

What they didn't realize was that they could go to their Personnel or HR Department and raise their exemptions to a point that they could actually receive $243.00 greater take home per paycheck. They, like most people, are under the mistaken impression that they can only count people as exemptions. They did not realize you could legally claim exemptions based on legal tax deductions they are entitled to.

So if their new payment came out to be $1,147.00 per month PITI, (Principal, Interest, Taxes and Insurance) they could offset that payment with the additional $243.00 per month take home pay to effectively bring their dream home payment down to $904.00! That's well within their range!

(This is an example only to explain the general concept. Please check with a tax advisor for specific details and up to date tax charts)