Not permitted to deduct mortgage interest from taxes - mortgage v renting?

[claire]

It appears that you all offset the interest on your mortgages. In Britain there is no such entitlement.

Would it make a difference to your opinion on the mortgage v renting argument if you could not claim credit for mortgage interest payments in the US?

DH and I are thinking about selling our home at present. main reason we have a lot of equity in it which we could use to invest, also we could rent something similar for £2 - £300.00 per month cheaper.

I just wondered if it would change anyone's opinion on the mortgage v renting argument if you had to pay the interest on a mortgage ?

 

[JustCurious]

It appears that you all offset the interest on your mortgages.

Not true. I am not permitted to deduct my mortgage interest from my taxes because I do not itemize my deductions. And I am by no means alone--the majority of Americans do not itemize deductions, therefore, a majority of Americans cannot and do not deduct their mortgage interest from their taxes. Also, even for the minority who itemize, the mortgage interest deduction only has value to the extent of the marginal difference between the total itemized deductions and the amount of the standard deduction. Thus, the percentage of Americans who actually get the marginal benefit of deducting all of their mortgage interest is actually quite small indeed.

http://www.bankrate.com/brm/itax/news/20030207a1.asp

http://www.bankrate.com/brm/itax/Edit/tax_season/stories/non_itemizers.asp

 

[Empty Pockets]

I agree, most people in the US that think they are getting a large tax deduction don't realize that they're only getting the deduction for the amount over the standard deduction. And then, look out for the alternative minimum tax.

In my opinion, don't let the tax deduction on mortgage interest be a reason to own a home.

You own a home because you want to have it as your home. When I hear someone say that their home was the best investment they ever made, probably never made any other investments. For some, they need the forced savings plan of a monthly mortgage and wouldn't invest otherwise.

Live in the home you're happiest living.

 

[Meadbh]

Claire, is the option of using an investment loan to pay for your house open to you?

In Canada, home mortgage interest is also not tax deductible; the payback is that capital gains on a principal residence are tax free. However, one can take out an investment loan to buy property, and the interest on the loan is tax deductible.

 

[JustCurious]

I agree, most people in the US that think they are getting a large tax deduction don't realize that they're only getting the deduction for the amount over the standard deduction.

Empty Pockets, you are so right, most people just don't understand this. I often hear people talking about how they get to deduct their mortgage interest, and when I tell them that they are really only getting the benefit of a portion of the deduction, they usually look at me like I'm crazy, and they just don't get it. And when I tell them that I can't deduct any of my mortgage interest, they then become convinced that I am some kind of idiot, because "eveyone knows you can deduct mortgage interest." It is frustrating when people think they know more than they really do.

Sometimes common misconceptions become so common that, even if they are wrong, people believe them despite being told the truth.

 

[Khan]

Empty Pockets, you are so right, most people just don't understand this. I often hear people talking about how they get to deduct their mortgage interest, and when I tell them that they are really only getting the benefit of a portion of the deduction, they usually look at me like I'm crazy, and they just don't get it. And when I tell them that I can't deduct any of my mortgage interest, they then become convinced that I am some kind of idiot, because "eveyone knows you can deduct mortgage interest." It is frustrating when people think they know more than they really do.

Sometimes common misconceptions become so common that, even if they are wrong, people believe them despite being told the truth.

I had a coworker who actually (on a financial adviser's suggestion) sold a small house and bought a McMansion 'for the tax benefits'.

 

[hellbender]

I agree, most people in the US that think they are getting a large tax deduction don't realize that they're only getting the deduction for the amount over the standard deduction.

Empty Pockets, you are so right, most people just don't understand this. It is frustrating when people think they know more than they really do. Sometimes common misconceptions become so common that, even if they are wrong, people believe them despite being told the truth.

The statement that mortgage interest deductions are only achieved to the extent they exceed the standard deduction amount, is usually false. Anybody who itemizes most likely realizes a benefit much larger than the difference between the standard deduction and the mortgage interest amount. Frequently it is the mortgage interest deduction that allowed them to itemize in the first place. This subsequently allows them to deduct state and local income taxes, personal property and real estate taxes, excess medical and miscellaneous deductions, etc. Depending on an individual's personal situation, including the amount of gifts and charitable contributions made, the amount of mortgage interest could be well below the standard deduction amount and yet still be 100% deductable.

 

[kcowan]

In Canada, home mortgage interest is also not tax deductible; the payback is that capital gains on a principal residence are tax free. However, one can take out an investment loan to buy property, and the interest on the loan is tax deductible.

A couple of clarifications:
1) Capital Gains rollover is allowed in the US so there is no "payback"
2) Borrowing for a principal residence in specifically not deductible. Most people do not deduct interest payments of any kind (except incidental amounts in investment accounts).

AMT also applies in Canada and is capturing more of the middle class every year because of inflation same as in the US.

 

[JustCurious]

The statement that mortgage interest deductions are only achieved to the extent they exceed the standard deduction amount, is usually false. Anybody who itemizes most likely realizes a benefit much larger than the difference between the standard deduction and the mortgage interest amount. Frequently it is the mortgage interest deduction that allowed them to itemize in the first place. This subsequently allows them to deduct state and local income taxes, personal property and real estate taxes, excess medical and miscellaneous deductions, etc. Depending on an individual's personal situation, including the amount of gifts and charitable contributions made, the amount of mortgage interest could be well below the standard deduction amount and yet still be 100% deductable.

Hellbender, I agree. Here is my origional quote: "The mortgage interest deduction only has value to the extent of the marginal difference between the total itemized deductions and the amount of the standard deduction." This statement is correct.

It is also true that most people (including me) do not deduct mortgage interest expense from their taxable income, since most people take the standard deduction.

 

[Meadbh]

2) Borrowing for a principal residence in specifically not deductible. Most people do not deduct interest payments of any kind (except incidental amounts in investment accounts).

Yes, BUT......my understanding is that you can borrow to replace securities that you liquidate from your portfolio. I want to find out more about this strategy as I may want to use it.

 

[free4now]

The tax deduction is just one part of the puzzle when deciding whether to rent or buy. Now that I'm FIRE'd I won't get nearly as much deduction as when I was working, which is part of what inclines me to sell and rent.

What I think is sad is the way that all the recent mortgage debt Americans have taken on will end up reducing taxes collected. A double whammy for America from the housing fiasco.

 

[JustCurious]

What I think is sad is the way that all the recent mortgage debt Americans have taken on will end up reducing taxes collected. A double whammy for America from the housing fiasco.

You might be correct regarding federal taxes, but local governments LOVE the housing boom because property tax collections have increased substantially.

 

[Alex]

Home ownership provides other benefits outside of taxes. But in my case it does provide very real tax benefits as well. I itemize my deductions so, for me, it would be silly not to own. But If I had no interest deduction, I would still have write-offs due to my home based business, so I would still own. truthfully, I like owning. I feel more secure owning. I doubt I'll ever again be a renter, but who knows, I'll cross that bridge when and if I come to it!

to answer your question though, Yes, I would own even if there was no tax advantage. Some of the benefits of ownership: Potential price appreciation, inflation protection, ability to improve the property as you see fit, location stability-can't be forced to move by landlord, better neighbors and neighborhoods - owners have a vested interest in their neighborhood, MORE ROOM- apts and condo's are small!! There are plenty more benefits too. I am sure you can come up with some cons...but for me it doesn't matter - I am definetly biased in favor of ownership