Many people know that the interest paid on a mortgage is deductible on their income taxes. But they don’t understand how it really works.
When you understand the way a tax deduction works, you should be able to estimate the amount of tax relief you would receive from owning your own home and paying a mortgage.
First, you need to know what is deductible. In many cases, homeowners are allowed to deduct the amount of mortgage interest paid from their income. They are also able to deduct the amount of real estate property taxes paid on the property.
For example, we have a homeowner and a renter who both make the same annual income of $60,000.
The renter pays $1,000 a month in rent and receives no tax benefits for renting a home.
The homeowner holds a $140,000 fixed rate mortgage with a 7% interest rate. His total mortgage payment is $1,100 a month. He pays $1,500 in real estate property taxes. His total mortgage interest paid for this tax year was $9,755.
Here’s where the taxes make a difference. The owner is able to deduct $11,255 from his income before he calculates his tax liability. The renter has no deduction from his...
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