VA Loans and Mortgage Interest Deductions
You’ve probably heard about the tax advantages of home ownership compared to renting, right? The mortgage interest deduction is one of the few allowable deductions from taxable personal income that survived the federal tax overhaul back in the 1980’s. Then, a variety of income tax deductions were available, even interest on credit card debt. Today however, the mortgage interest deduction remains. But how does that affect how much taxes you pay?
First and foremost, this is not to be construed as tax advice. All tax questions should be addressed to a licensed financial planner or CPA. This article only provides a general description of tax deductibility.
There are actually two deductions available to homeowners who have a mortgage; mortgage interest and property taxes. Three if you count any discount point paid to lower the mortgage rate on a VA purchase loan.
Say you and your spouse make $85,000 per year, before taxes. Now say that you have a 30 year fixed rate mortgage on a $300,000 loan at 4.00 percent. Over the first 12 months, you paid nearly $12,000 in interest. Tax deductible interest. You also paid $2,000 in property taxes for that same year for a total potential deduction of $14,000.
Now say you rent, with no mortgage interest nor property taxes. You will be taxed on $85,000. If you owned a home and financed it using the above example, your tax liability will be calculated using $71,000 of income, instead of the higher, $85,000 amount.
Again, this is a simple explanation and doesn’t take into consideration personal exemptions, household size, filing status and other factors. But generally speaking, when you own a home instead of renting, your income tax bill is reduced. And it’s probably the biggest single deduction most homeowners take each year. Financially speaking…it’s worth it.