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# With a house, how much will I save in taxes? (1 Viewer)

#### Shayne Judge

##### Stunt Coordinator
Ok, my wife and I are planning on having a house built, and I am trying to get a good estimate of how much we will save in taxes each month. After reading the book, "Buying a Home for Dummies," it suggested the following formula. I would like some input on whether this is accurate information. Keep in mind that there is no state income tax in Florida.
To paraphrase the book:
To figure out how much money you will save in taxes, use the following formula: Multiply your monthly total of principal, interest, and property tax by your tax rate.
In my case the numbers will be as follows.
(973+200) *.28% equals a tax saving of \$328 per month. Is this an accurate formula? Also, what would be the best way of adjusting my tax witholdings so that we can come out even for the tax year? I hate the idea of owing money and the idea of giving the government a tax free loan.

#### Jeff Ulmer

Senior HTF Member
Deceased Member
I don't know how it works down there, but owning a house up here doesn't save you squat on taxes - it adds to them. The only time you save is if you have a home based business or a rental operation, then part of the property becomes tax deductable, and both of these are on income tax.
Up here you add property tax, utilities (with tax), insurance (with tax), and some more tax.
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#### Kevin P

##### Screenwriter
To figure out how much money you will save in taxes, use the following formula: Multiply your monthly total of principal, interest, and property tax by your tax rate.
To clarify, only the interest and property taxes are deductible on your federal taxes. Not the principal.
You'll save on your federal taxes, but you'll be paying property taxes, interest on the mortgage, utilities, maintenance, etc. Still, it beats renting any day, since you build equity in the property as you pay off the mortgage, rather than lining someone else's pockets with rent, which isn't deductible at all.
KJP

#### Todd Hochard

Senior HTF Member
The tax savings is quite deceptive. I wouldn't buy a home for that reason.
The calculations you used are the typical "way overstated, way too generous" methods. Consider this:
You get a standard deduction every year. If you own a home and itemize, the only real savings is the amount of interest and real estate taxes deducted over and above the standard deduction. On a \$125000 home, it will only amount to a few hundred dollars for the year.
Now, you can say that if you rent, you don't pay taxes, but you pay, believe me. The landlord simply passes that cost, and many others, on to you in the form of higher rent.
I've owned my home here in Orlando for 7.5 years. When I bought the home in 1994, the comparable rent cost was about \$150/month higher. That cost is now about \$400/month higher than my mortgage, taxes, and insurance put together. When I refinance at 6%, that will be about \$100 better still.
In FL, I'd say you should definitely become a homeowner.
Todd

#### Shayne Judge

##### Stunt Coordinator
Kevin: Ok, would the following formula work then? (Interest + Property tax) * Federal Tax=savings?
For a ~ total of (773 + 200) * .28= \$272 savings each month.

#### Shayne Judge

##### Stunt Coordinator
Todd: Ok, thanks for the information. The possible tax savings has very little, if any, impact on our decision to buy a home. We moved here from San Jose, CA primarily due to the cost of buying a home, as we plan on starting a family next year. I was simply curious if my tax savings would be negligible or worth salivating over.
On a positive note, I will be able to let my Tempest sonosub growl soon(renting an apartment right now), and I already told my wife, "I dont care about the cabinets, the carpet color, the light fixtures, or the wallpaper. I simply want a 65" HDTV." I plan on posting some topics on the subject of pre-wiring our house and building a HT room in the near future. I am rather excited about that project.

#### Robert McDonald

##### Stunt Coordinator
Shayne, that formula is generally correct (if your income is too high you don't get 100% deduction). Also, remember that for initial financing there are certain loan costs, i.e., points, that can be deducted from your taxes the year you take out the loan (for refinancings they have to be amortized over the life of the loan).
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#### Ashley Seymour

##### Supporting Actor
Shayne,
Go grab a Schedule A to your 1040. You will get a standard deduction of \$7,500. If you itemize, you will need more than that to make it worth the bother to fill out the Sched A.
If you have a \$100,000 loan balance and an interest rate of 6%, you will have \$6,000 (or so) in interest expense. Only you will know what other deductions you can add on the Schedule A. Your real estate taxes, church contributions, Salvation Army, etc.
A \$100,000 loan balance may save little if any in taxes.
If you have a \$150,000 mortgage with \$9,000 interest deduction, taxes, etc. you can figure the tax savings on the difference between that will you enter on the Schedule A and \$7,500 at 28%. If you claim \$12,000 and you will get \$7,500 anyway, the marginal increase in claimed deductions is \$4,500 and at 28% that is \$1,260 in tax savings.
I just went back to check the math. You did give the payment on your mortgage and it was not that hard to figure your mortgage. A \$162,288 mortgage balance at 6% for 30 years gives about \$9,700 a year in interest deductions plus your estimate of \$2,400 in tax deduction. Still about \$1,500 in tax savings with other deductions.
[Edited last by Ashley Seymour on November 14, 2001 at 03:01 PM]

#### Derek Bang

##### Stunt Coordinator
As a CPA, I couldn't resist stepping in! I have to agree with Todd. The savings is the deduction above and beyond the standard deduction. Thus, the formula would be [(Interest + Points if applicable + Property Tax)-Standard Deduction Amount]*Highest Federal Tax Rate Applicable.
Regardless of tax deduction, you will potentially get a return on the property value also. I.e. you buy the home at \$100,000 and sell 5 years later at \$120,000. However, you may have bought it with only 5% down. That's a pretty good return on a small investment.
Also, you have the option of home equity loans, which can be very useful (and deductible).
Rates are so low right now that if you can do it, find the right price/location and go for it! Oh yeah, and if you're not going to be there for but a few years, don't pay closing costs. Get a zero points/zero closing costs loan, then refinance if rates drop 'til they bottom out...

#### Patrick Sun

Senior HTF Member
After deducting for the mortgage interest, I find that the taxes I save in paying the Feds saves me around one house payment.
So, looking at it from a rental's POV, if I owned a house, I get one month's free rent by owning the house. Plus I get the appreciation value when I sell the house later.
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#### Todd Hochard

Senior HTF Member
I'm just glad the CPAs agree with me, because when it comes to taxes, I don't know what the heck I'm talking about.
I already told my wife, "I dont care about the cabinets, the carpet color, the light fixtures, or the wallpaper. I simply want a 65" HDTV."
Believe me, I can sympathize with this mentality, but don't short change yourself on getting the house "done right." The TV can be easily added (and upgraded), but kitchen cabinets- that's a whole different game. Choose wisely on difficult-to-add upgrades (showers, extra fan drops, layout changes, etc)- you may live there a lot longer than you think. I know we have.
Todd

#### PhilipW

##### Second Unit
Shayne that formula might work in some cases but it would be for a year not a month. And as stated above only if you itemize and have enough deductions to get over the standard deduction.
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