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Does Mortgage Interest Tax Deduction Encourage Debt Or Home Ownership?
There seems to be a consensus among real estate salespersons and their professional association that mortgage interest tax deductions play an integral role in facilitating home ownership.  There are numerous solicitations based on, at least in part, the advantage of a tax deduction for "owning" over renting.  By definition, those solicitations are aimed at first time home buyers.
Often, first time buyers have relatively low income and buy relatively low priced homes.  Their mortgage debt does not generate enough interest expense to gain benefit from an itemized tax return over the standard deduction.  Many first time buyers gain no tax advantage in owning over renting.  The expected  tax advantage is effectively a myth.  They may be happy to enjoy the lifestyle upgrade often associated with owning over renting, but the tax advantage for their debt is non-existent.
How about the move-up buyer?  Let's say that, for example, a homeowner sells his/her/their home with enough capital gain to make a down payment and cover sales and closing costs on a $375,000 house.  Their debt would be about $300,000, and a 4% loan would generate around $12,000 in interest the first year, decreasing incrementally each year as the principal decreases.  That $12,000 debt interest represents ... more

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