Tax Savings Associated With Homeownership Are Not What They Used To Be

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Since 2008, the typical American homeowner has not benefited from the income tax savings associated with owning a home like they have in the past

April 14, 2016

No one likes to pay Uncle Sam. It’s akin to someone handing you a nice, juicy hamburger only for a stray dog to come out of nowhere and snatch it away before you can even get your hands on it. In the past, homeownership was one of the best ways to tame this stray dog, as homeowners benefitted both financially and psychologically from the tax breaks associated with owning a home. But since 2008, mortgage interest plus property taxes have not been exceeding the standard deduction allowed by the IRS for many America homeowners. The upshot? Income tax savings are no longer as beneficial, Realestateconsulting.com reports.

Falling interest rates and reduced mortgage interest combined with a rise in the standard marital deduction (which has risen from $1,300 in 1972 to $12,600 today) have all but eliminated the income tax benefits of owning a home for an average American. The increase in the standard marital deduction means the first $12,600 of itemized deductions has no benefit to consumers. A typical first-time homebuyer who is financing 95 percent of less of a median priced U.S. home would end up paying less than $12,000 in mortgage interest and property taxes over a given year. Even with the addition of other deductions that would bring the taxpayer over the $12,600 threshold, the result would be minimal savings. 

In 1981, a typical homeowner with an 80 percent loan-to-value mortgage and a 1.5 percent property tax rate on a median-priced U.S. home would pay $5,852 in interest and property taxes over the standard deduction. Today, that same homeowner would pay $2,489 below the standard deduction. 2007 was the last time a typical homeowner paid in excess of the standard deduction. Since then, the possible income tax benefits of owning a home have been nonexistent for most and have nearly disappeared as a reason for buying.

The lack of tax benefits can be added to the list of possible reason why homeownership rates are as low as they have been in decades, especially for entry-level homes.

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