Tax Advantages of Home Ownership
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Calculate Your Real Estate Tax Break
As a licensed tax preparer in
California, let me do my best to help you understand the excellent tax
benefits of homeownership.
Below we are comparing the tax returns of man who is renting with the tax
returns of the same man as a homeowner to illustrate the tax advantages of
homeownership. The tax savings of homeownership are substantial. Below the tax
returns is a complete analysis to clarify these tax benefits of home ownership.
Analysis of Returns
Joe Renter and Joe Homeowner are both single men with $50,000 of annual
income. The tax advantage of homeownership makes Joe Homeowner much better off.
Here's how it works:
- $50,000 annual salary
- Joe rents for $1,200 per month
- Tax deductions = $5,000 Standard Deduction for single person + $3,200
- Taxable income = $41,800
- Total income taxes = $9,346 ($7,121 Federal and $2,225 State)
- Combined tax rate is 18.7% ($9,346/$50,000)
- Annual housing expense = $14,400 ($1,200 x 12)
- Annual housing expense + income tax = $23,746 ($14,400 +
- $50,000 annual salary
- Joe purchased a $250,000 condo using a $243,500
CalHFA 1st mortgage
fixed for 35 years at 5.75% with interest-only monthly payments of $1,123, A
CalHFA HiCAP silent 2nd mortgage of $7,500, a
CalHFA CHDAP silent 3rd
mortgage for $8,000, and a
Community Housing Works CASH program silent 4th
mortgage of $10,000 to cover closing costs.
- Total deductions = (Schedule A deductions of $13,483 mortgage interest,
$3,125 property taxes, and $1,093 state taxes) + $3,200 personal exemption
- Taxable income = $29,099
- Total income taxes = $5,089 ($3,996 Federal and $1,093 State)
- Combined tax rate = 10.8% ($5,089 / $50,000)
- Annual housing expense = $17,208 ($13,483 total annual mortgage payment
+ $3,125 annual property taxes + $600 annual insurance)
- Annual housing expense + income tax = $22,297 ($17,208 + $5,089)
Please note that home ownership has saved Joe $1,449 per year ($23,746 -
$22,297). Joe can realize that savings by either getting a great big refund at
the end of the year if he keeps his tax withholding from his paycheck the same
as it was when he was renting. If Joe wants to, he can get that savings right
away by adjusting his federal and state income tax withholding from his
paycheck. As a homeowner, he now pays $4,257 less in total income taxes
($9,346 - $5,089). He could submit an updated W-4 for federal withholding and a
DE-4 for state withholding to his employer. By doing so, Joe could have his
take-home pay increased by $354 per month and still have all income taxes
covered. As a homeowner, his monthly housing expenses have increased by $234 but
his monthly take-home pay has been increased by $354.
As a result, Joe has $120 more per month to spend
because he is now a homeowner!
For further information about the immediate tax advantages available new home
owners, click here to bring up
IRS Publication 530 - Tax Information For
I am a licensed tax preparer in the State of California.
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