The Tax Benefits of Owning Versus Renting

April 15th is quickly approaching and it is time to ask yourself, what has your apartment done for you lately?  When it comes to evaluate the benefits of owning versus renting, the benefits you reap or don’t can easily indicate which is better for you in the financial long-term. One of the main advantages of owning instead of renting is when it’s time to file your income taxes. It’s quite an impact and so much so you may wonder why you didn’t buy sooner. Note however, for personal income tax advice you need to speak with your tax preparer but here are some general tax advantages you’ll soon discover.

Mortgage interest is a tax deduction. That means when you begin calculating your taxable income, mortgage interest is deducted from that amount, lowering your overall income tax bill. Your lender will send you a 1099-INT form that will show how much interest you paid over the previous year and you use that amount when figuring your taxes. And because most of the monthly payment in the early stages of a home loan is dedicated toward interest, most of your payment will be tax deductible. For example, say you have a 30 year loan and borrow $250,000 at 4.00%. Your payments are just shy of $1,200. Your first payment of $1,193 includes $360 toward the loan balance and $833 to interest. Over just the first year alone your mortgage interest tax deduction is $9,919.

Now compare that mortgage payment with a rent payment of $1,200 each month. You can’t deduct interest from your rent because you don’t own the home. Your landlord takes the mortgage interest deduction and you’re the one making the payments.

When you discuss your loan options with your loan officer, when you select a loan type you will also have the option of paying discount points. Points are expressed as a percentage of the loan amount and used to lower the interest rate on your loan. Points are a form of prepaid interest and therefore qualify as an income tax deduction. If you pay an origination fee on your loan, that too is tax deductible.

One thing you don’t pay when you rent is property taxes. Your landlord will use the rental income to help pay for the property taxes but the landlord will also be able to deduct those property taxes from taxable income. When you own you will also pay property taxes but just like mortgage interest, property taxes are also deductible from your taxable income.

So go ahead, take some time and run some numbers on how much your total income tax deductions might be and compare the income tax bill on owning vs. renting. We think you’ll be surprised at what you’re missing!