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Sunday, February 26, 2017

Paid Lots of Mortgage Interest This Year? Too Bad.

Tax season is upon us.  Last week, I sat with my Enrolled Agent at her office (I was there to submit all of my pertinent documentation for her to prepare our tax return) and had an interesting conversation about mortgage interest.  She described how unfortunate it is (for tax purposes) to have lots of mortgage interest to report for your tax return.  It basically means you paid a lot of money to the bank for little in return.  Let me explain.

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Many people new to being a homeowner have this misconception about mortgage interest.  They believe all of it is deductible.  They were sold on being able to deduct mortgage interest from their taxes as one of the benefits of owning a home.  And while that isn't a lie per se, it isn't the entire truth either.

First of all, not every home owner is eligible for a tax break from their mortgage interest.  If you don't itemize, you can forget about reporting your mortgage interest.  Why wouldn't people want to itemize if they own a home?  Well, the math may not make sense to do so.  Your tax preparer (that may be you) should know if you have enough deductions that add up past the standard deduction you could otherwise take as part of your filing status.  For example, for married couples who file a joint return, the standard deduction is $11,600.  If all you have is a home with no other personal businesses, your deductions may not add up to this amount.  Therefore, you don't get to itemize.  All that mortgage interest you paid...useless and costly.

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Now to address the other bad news.  Say you do have enough deductions, well, do you honestly think the IRS would want to give you a dollar-for-dollar break on your personal home mortgage interest?  Think about it, you live in that home, why should all of your mortgage interest be deductible?  When you go on a trip as a business owner, you only get to deduct 50% of your food expenses.  You have to eat anyway!  The IRS is a slick machine, logically taking as much of their cut as possible.  So in the case of your mortgage interest, the tax deduction you qualify for is dependent on your tax bracket.

Here's an example.  Say you're in the 35% tax bracket, and you have reported $12000 in mortgage interest.  Well, you only get to exclude $4,200 (35%) from taxation.  That's pennies on the dollar if you're paying attention.  Pretty sad, huh?  Can you imagine those poor bastards who buy up huge properties and are at the beginning of their amortization schedule, paying almost everything to interest.  This is a sucker's game!  In the case above, you may be better off taking the standard deduction, again, depending on your tax filing status.  Look it up!

If you're in a lower tax bracket, your benefit is even less.  For the same amount of mortgage interest from above ($12000), a filer in the 25% tax bracket would only get to exclude $3K from taxation.  Boo!  What does all of this mean?  Well, if you're considering buying a home, you may be better off renting, especially if all you'll have to itemize is your mortgage interest.  If you're a professional working for the Man, owning sounds great, but you better have a lot of other assets.  Like me!

I have three rental homes, and an Internet business along with my day job.  I itemize yearly.  So although I too am paying a butt load of mortgage interest to the bank on my personal residence, at least I get a dollar for dollar deduction on rental income versus my expenses as a landlord.  Moral of the story...buy assets.

If you can afford it, get into a 15-year loan so you pay far less interest to the bank for the life of the loan.  Or better yet, pay your home outright from the start.  If you're not a shrewd and successful investor, putting your spare cash to pay off the mortgage sooner may be the best course of action for you.  Thanks for reading!  If you liked this informative post and want to get more like them, please subscribe below:


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