Home Equity Blog

There's a dirty little secret some real estate agents probably don't want you to know.

You don't have to pay 6% commission to sell your home.

If you do, you're throwing away thousands of dollars that should go into your pocket.

Recently, I saw a compelling commercial for life insurance.

Financial experts and laypeople often cite the home mortgage interest tax deduction as a major benefit of home ownership.

Too bad their logic is often flawed because of common misconceptions about how tax deductions work.

Taxpayers can only claim the mortgage interest deduction if they itemize, and it only makes sense to itemize if the sum of your individual deductions exceeds the standard deduction.

For some homeowners, especially ones who purchased less expensive homes, who have lower interest rates, who are a number of years into their mortgage and/or who are filing jointly, mortgage interest payments will be less than or will barely exceed the standard deduction.

For 2011, the standard deduction is $11,600 for married couples filing jointly, $5,800 for singles and married individuals filing separately, and $8,500 for heads of household.

About two-thirds of taxpayers take the standard deduction. About two-thirds of Americans are homeowners.

Clearly, not everyone is seeing tax benefits from home ownership. (Homeowners who have paid off their mortgages, of course, have no interest to deduct.)

The first and second years of home ownership have the greatest potential for tax benefits, because homeowners pay the most interest at the beginning of the loan term. Taxpayers can usually fully deduct any points they paid to reduce their mortgage interest rate in the tax year they buy the home.

Interest payments could be minimal for the first tax year, though, if the sale closed late in the year, meaning minimal tax benefits.

Since interest payments gradually decrease over the life of a home loan, homeowners in the later years of paying off a mortgage might lose their mortgage interest deduction.

The standard deduction might provide equal or greater tax savings.

Another common misconception relates to the difference between a tax deduction and a tax credit.

A tax credit reduces your taxes dollar for dollar. If you get a $2,500 tax credit, your tax bill will be $2,500 lower.

The tax benefits associated with home ownership are deductions, not credits.

They reduce the amount of your taxable income. Their dollar value is equal to the amount of the deduction times your marginal tax rate.

To be more accurate, their dollar value is equal to the amount of the deduction minus the standard deduction times your marginal tax rate.

So, if you have home-ownership-related tax deductions totaling $15,000, you are married filing jointly and you fall into the 25% marginal tax bracket, you aren’t saving $15,000 on your tax bill. You also aren’t saving $3,750 on your tax bill ($15,000 x 25%). You’re saving $850 ([$15,000 - $11,600] x 25%).

In the past, when interest rates were substantially higher (such as in the 1980s), the deductions were worth much more, but homeowners should still understand the true level of tax savings that home ownership brings, how these savings are calculated and that these savings are often overstated, even by financial and real estate experts.

The bottom line is that buying property to get tax benefits is the wrong reason to buy property.

The additional expenses associated with owning property will probably offset any tax benefits you receive.

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If your home was destroyed today, would you be able to prove what was in it and how much it was worth? What if your home was burglarized?

Don’t use your home equity like an ATM! That’s part of what caused the subprime mortgage crisis, and it’s not good for your personal wealth, either.

Your mortgage interest deduction is safe for now, but Washington is in a cutting mood.

So there's no telling what might happen as the Joint Select Committee on Deficit Reduction -- Congress' so-called super committee -- nears its Thanksgiving deadline for coming up with a plan to cut government spending over the next decade.