Buying Real Estate

Deciding whether to buy your first home or to stay in the rental market is often a difficult decision for many first-time home buyers. However, the right choice often becomes a lot clearer once one understands the federal tax deductions available to all homeowners.

Many first-time home buyers have heard about these tax incentives, but are still unaware of how their specific situation will be impacted. Here, I will attempt to offer a simplified explanation that will hopefully help you to understand the tax deduction impact on your monthly payments and how to set it up to allow you to purchase your new home and still feel like you have breathing room in your budget. Here we go....

The main thing to know is this:

there are substantial tax incentives available for all home owners when they buy or purchase a home.

If you are thinking about buying a property (or properties), you need to understand how the federal government helps you with the purchase of that home since the deductions allowed make buying real estate a lot easier than would otherwise be possible. Whether you are buying a used home (resale) or new construction from a builder, these deductions are available to you each and every year as long as you are a home owner.

Your Federal Marginal Tax Rate

First, you need to know what tax bracket you are in (just look at the chart). Your federal marginal tax rate is used to estimate the amount of additional taxes you will pay if your income increases. Simply put, the more you earn, the higher rate you will pay.

Example:  If you are single and your Taxable Income is $52,000, you are in a 25% federal tax bracket (check tax table below).

                     Federal Tax Rates (Brackets) for 2003:

Now, let's say that YOU are single and earning $52,000 per year and YOUR tax bracket really is 25%. Big deal. What now?

Well, in a nutshell, it comes down to this: For every additional dollar* that you spend on tax deductible items (like mortgage interest and real estate taxes), you will be able to reduce your taxable income by 25 cents.

What does that mean? It means that if you were to buy a $125,000 home and your payment was say $1000.00 a month, then your REAL situation would look something like this:

$1000.00 - Monthly Mortgage Payment

 ( 100.00) - non deductible items like insurance and principle reduction)

_________

$900.00  per month deductible -  times 12 months for a full year:

X       12

_________

$10,800 annual tax deduction*.

There, we have our deduction attributable to buying a home. Now, we simply multiply by our tax bracket to get our annual tax savings. Like this:

$10,800

X     .25    (25% tax bracket at $52K income)

_________

$2,700.00 actual annual tax savings. This is the same as $225.00 per month - every month. What I'm saying is that your federal income tax will be reduced by $2,700.00 a year just because you own a home!*

Is that cool, or what? Now listen up. This is the most important part for home buyers still in the rental game.

You go to your HR/payroll department at work (if married, you both go). Tell them that you are buying a new house and you want to INCREASE YOUR W-4 WITHHOLDING EXEMPTIONS so that the employer will withhold $225.00 per month less in taxes than they were taking out previously. It doesn't matter what the final number of exemptions is as long as it gets you the additional $225.00 per month in your payroll check.

At the end of the year, you will not owe any more or less than you would have when you were renting and if you received a refund before, it should be about the same.

Now, look what you have done ---

Your REAL NET MONTHLY PAYMENT is not $1000.00 (even though you are writing the check for $1000.00 to the mortgage company). Your real payment is:

$1000.00  - check amount

(225.00)   -  less your new raise (less taxes withheld from your check)

________

$775.00      Your NET payment. 

Uncle Sam has subsidized your purchase by $225.00 a month!  And, the more you earn, the more the subsidy could become.

That net payment above probably looks a lot like what you are paying in rent right now. Now you know how everyone seems to be able to afford a new home but you. So, stop playing the rental game and get out there and get your piece of the pie. Purchase a home!

Ready to get going now? Click here to contact a knowledgeable

Realtor - Real Estate Agent.

* assumes that you have enough additional itemized deductions to exceed the zero bracket deduction.

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