Real Estate Tax Savings Can Pay Off Big

It may be easiest to see the tax savings with an example.  This is not meant to be tax advice, is not guaranteed, etc., etc., but is intended to give you an idea and some things to talk to your CPA about.  

Let's say Pat earns $50,000 a year and is paying $1500 a month on rent.  Pat's real estate deductions are, well, zip.  No deductions for renting.  Pat buys a condo for $225,000 putting 10% down and the rest on a 6.5% mortgage.  Pat's mortgage payment is about $1280, of which about $200 goes to principal and the rest to interest the first year.

Pat's tax deductions for the first year look like this:

Pat will save $4,931 in taxes!  That works out to be about $410 per month.

Let's look at Pat's total costs:

Even though Pat's payments are higher with homeownership, the savings will be almost $200 a month when taxes are considered!  

When calculating tax savings, don't forget to include state taxes as well as federal.  For example, in 2008, the federal tax rate for someone making $50,000 a year their federal tax rate is 25%.  The California income tax is another 6% for a total of 31%.  

And there is a BONUS!

If Pat is a first-time homeowner and buys before November 30, 2009, Pat may qualify for a $8,000 tax credit that does not have to be repaid!

Look up your federal tax bracket here.

 Freddie Mac Tax Savings Calculator

Not tax advice - see your CPA or tax professional.  Contact us if you need a referal to a great tax person.