- The Washington Times - Wednesday, February 21, 2007

Q: My wife and I began the process of purchasing our first home a couple of years ago. We made four offers on four different homes, but the market was so hot that we lost each one to higher bidders. We decided to put off buying a home for a while and continue to rent.

Now that the market has softened, we are back in the house hunt. Our real estate agent says that we should have continued to make offers because one would eventually get accepted. She said that the last two years of renting made us lose a lot of tax advantage. Can you explain the real tax benefits of homeownership?

A: Since the real estate market has market has slowed, it seems to me that your timing has been pretty good, irrespective of the tax advantages of homeownership. Two years ago, homes were being sold at bid-up prices and often without normal buyer protections such as financing and inspection contingencies.

I think you were right to avoid getting sucked into the herd mentality that caused the market’s imbalance. Today, the market is far kinder to buyers, and you are more likely to get a better deal.

I’m no tax expert, but let’s take a broad look at the tax advantages of homeownership versus renting.

For most folks, mortgage interest and real estate taxes are deductible on personal income tax returns. A homeowner with a $300,000 loan at 6 percent, for example, might pay about $18,000 in interest in the first 12 months. Let’s say he also pays $3,000 in real estate taxes.

By itemizing deductions on the tax return, a married couple filing jointly can deduct $21,000 from his taxable income. A renting married couple may not have a lot of deductions, so they might choose the standard deduction, which is $10,300.

The couple that owns the home receives an additional $10,700 in tax deduction than the renting couple. Let’s assume both couples each earn $100,000 per year. The renting couple would have to pay income tax on $89,700. The owning couple would pay tax on $79,000.

I poked around the Internet and found the Federal Income Tax rates. After making some calculations, I determined that the tax liability for the renting couple would be $15,540. The tax liability for the owning couple would be $12,865. The owning couple saves $2,675.

While the tax advantages of homeownership are certainly significant, especially over the long term, homeownership in itself is the real source of wealth creation. Everyone must have a place to live, and while real estate is not without periodic dips in value, over time it has proven to be an excellent investment.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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