Passionate Pursuit of Purpose

Should I keep a mortgage for the tax deduction?

Posted by on Mar 23, 2013 in Perfect questions, Personal Finance | 2 comments

How big is the Mortgage interest deduction?Home

We often hear, “you should keep a mortgage on your home for the tax deduction.”  I am going to explore this statement, by using actual numbers from a tax return I prepared.

Ed and Daisy (names changed to protect innocent and guilty) are married with 3 children with an AGI of $99,318. They itemize deductions (pre 1986 referred to as long form) rather than take a standard deduction.  Below is a list of their itemized deductions.

Deductible medical expenses $0
State income tax paid $4,542
Real estate tax paid $583
Other personal property tax $383
Mortgage interest paid $7,010
Mortgage insurance premiums $520
Charitable contributions $223
Misc deductions $0
Total Itemized deductions $13,261

Ed and Daisy deducted $13,261 from their taxable income.  If they had not itemized, they would have only been able to take the standard deduction of $11,900.  Oh wait, they would have still had $11,900 deducted if they had not itemized!  So the real deduction gained from them itemizing was the difference between the standard deduction and their itemized deductions.

Itemized deduction $13,261
Standard deduction $11,900
Increase in deduction from Itemizing $1,361

So Ed and Daisy spent $7,010 on mortgage interest and only received a deduction of $1,361.  They are in the 15% tax bracket.  This means they saved $204 by itemizing.  They gave the bank $7,010 and saved $204 on their tax return.

Anyone who tells you to have a mortgage for the tax deduction doesn’t understand math.  I understand buying a home and using a mortgage to finance it.  I have a small mortgage on my home.  Don’t buy a home to save on taxes.

We buy a house to turn it into a home filled with love and laughter. Not to save on taxes.



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  • Substance-wise –> do you want to make it clearer between deciding to buy a home (one you live in) to save on taxes – which you are saying is stupid vs. investing in a house to have tax benefits… perhaps that’s where the confusion is to the layman.

    it’s a difficult to understand post if you don’t have some basic accounting understanding. e.g. what’s the difference between standard and itemized deductions, when and why do you do one over another… depends on who your audience is, you may wanna tweak the article to make it understandable to that audience.

    • Great questions and concerns. It is a very U.S. tax based article, so for my friends (and spouse) from other nations who don’t file American tax returns they will probably find this article of limited use.

      Deduction is not an accounting term, it is a tax term. Mortgage interest on a rental property is not a deduction it is a Business expense.

      It doesn’t matter whether it is your own home or an investment property you don’t keep or get a new mortgage for tax reasons. Do it because you want and can afford a bigger home. For an investment property do it because it fits your business plan and risk profile.