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Ok, I know I already wrote a post about how tax deductions are a bad investment, but I think the “mortgage interest” tax deduction deserves its own hate post. Now, I know I will probably get a lot of flak on this one, but I really don’t care at this point. So here goes:
Not sure if I’ve said this one before, but I ABSOLUTELY CANNOT STAND RADIO ADVERTISING!!! So, as usual, I found myself driving home and yelling at the radio because that’s what perfectly rational people do when they disagree with a piece of electronic equipment. It was an advertisement for buying some sort of custom house, and the big pitch by the radio personality was that “owning a home is better than renting because you get a TAX DEDUCTION!” I immediately told the radio host he was full of crap and DIDN’T EVEN UNDERSTAND WHAT HE WAS TALKING ABOUT! I quickly switched the station to smooth jazz and all was well with the world.
But the more I thought about the ad, the more I could not help but think that maybe that’s really one of the big reasons people justify buying a home. And don’t get me wrong, the tax deduction is a nice perk when you purchase a home, but it should not be the sole reason you decide to make the purchase. Heck, it probably shouldn’t even be in the top 5 reasons! I would even venture to say that you are better off NOT getting the tax deduction. Now, I know many of you will stop reading and jump straight to the comments, but hear me out on this one.
The Standard Deduction
Now, I have no actual evidence (not for lack of searching), but I venture to guess that many people who buy a home are married. Running under that assumption, let’s look at the tax code (oh, the joys!) to see how AMAZING this “mortgage interest’ deduction is.
To start our search, we need to know what the standard deduction is first. Why you ask? Because the mortgage interest deduction is WORTHLESS until you have eclipsed the standard deduction amount. Yes, I said worthless. Here’s how it works:
- Married Filing Jointly couples get a standard deduction of $12,200 for 2013.
- Average mortgage in U.S. in 2012 was $235,000. Interest on a 30-year mortgage at 4% would be roughly $9,325
- Your mortgage interest tax deduction did nothing.
But The “Smart” People Said It’s Better!
I know, I know. “Smart” people are going to tell you that getting a house for the tax deduction is a smart move, and will put you miles ahead of those “renter” types. And you don’t want to be a RENTER for your whole life, do you? Well, to answer that question, no, you don’t. Not because of the tax deduction, but because you can build equity in an appreciating asset. Also, because renting does kinda suck after a while 🙂
And yes, I know that with real estate taxes and other deductions you can eclipse the standard deduction and get a few extra bucks back on your taxes. But it’s not what people hype it up to be. Yes, you can lock in a super low interest rate like 4%, keep paying your mortgage at the standard rate and make more investing elsewhere. I understand that. But don’t act like you’re lowering your interest rate with the “mortgage interest deduction.” You’re not. The government’s standard deduction is free to everyone, and you’re paying a CRAPLOAD OF REAL MONEY to get your deduction. Sounds a little backwards, doesn’t it?
Comments: Did you buy your home for the “mortgage interest deduction.” Does your tax guy sell you on the benefits of having a mortgage for tax purposes? Do you hate me for pointing out that you are throwing away thousands of dollars every year and it the tax benefit is actually all smoke and mirrors?