How do I figure out my interest write-off?

How do I figure out my real estate write-off?

Well this is not as complicated as it seems, let me first let me clarify this question. When people refer to a write-off we are talking about the portion of your payment that is interest. The IRS lets you "write-off" this amount from your gross income. The remainder of your gross income after the write-off is referred to as your net and that is what you actually pay state and federal taxes on.

So if I make $100,000 per year and pay 15% of that in taxes then I am paying $15,000 per year in taxes. Now if I have a $2,000 a month house payment then I have around a $1,900 a month write-off or $22,800 per year. You simply take your gross income ($100,000) and subtract your write-off ($22,800) which leaves you with your net or taxable income which is now $77,200. Since your tax rate (percentage you are taxed at) is 15% you end up paying $11,580 in taxes instead of $15,000. So by having a house payment you actually pay less in taxes than if you were a renter.

See, I told you it was easy..

There are some things I need to clarify before I set you loose on the world with this new found knowledge. Number 1, your tax rate may be higher or lower than 15%, it is based on how much you gross per year. The more you make the higher your rate and vice-versa. Number 2, a interest write-off generally only applies to a owner occupied home, not a rental. The last thing you should know is to always speak to your accountant before you buy a home, having your finances in order is very, very important today and you can probably afford more home than you think. Besides the tax codes change every year, so don't think because it was true last year that it will be true next year.

Here is an example of the write-off math for you visual people

Household gross income = $100,000
Interest write-off = $22,800
Net household income (taxable income) = $77,200
Tax base of 15% = $11,580 in taxes on your net

So to bottom line you if you can afford $2,000 per month in rent, then you can afford a $2,300 a month in a house payment because you pay about $300 per month more in taxes without a house write-off.

A last closing thought is that there are sooooo many good benefits to owning a home and a write-off is just one of many, many great benefits. I will make sure that I cover more of the good stuff in my future blogs.

As always, thanks for reading and blog you later,

Brent