Ever since the U.S. Government created the mortgage interest tax deduction for homeowners, the tax advantages to buying a home vs. renting has been a major financial benefit to buying a home. VA loan eligible active military and veterans have a great advantage to access this tax advantage through their ability to get a VA loan with 100% financing. A huge special bonus right now on top of the standard mortgage interest tax deduction that has been available for decades, is the U.S. government is giving a $8,000 tax credit to new home buyers and a $6,500 tax credit to move up buyers available if you go into contract by April 30th 2010. This special one-time tax credit is discussed in other posts.
Here is a very quick and crude estimate of how much you will save by buying vs. renting. If you are a homeowner, you are allowed to deduct the total mortgage interest and property taxes you pay in a year from your taxable income. So let’s say you have a $350,000 VA loan on your house at 5%.
- $350,000 loan at 5% = $17,500 in interest per year
- $350,000 property purchase price, property taxes=$3,937 (estimating based on 1.125% average California property tax rate)
This would give you a total income tax deduction of $17,500 + $3,937 =$21,437. So as a very crude estimate I’m going to multiply this $17,500 by a tax rate of 35% and that is going to give a total tax savings of $7,502. So you are saving $7,502 in this case by buying vs. renting. This works out to be $625 per month. So say for example you had a rent payment of $1,500 per month. You could have a total housing payment (mortgage + taxes + home insurance) of $1,500 + $625= $2,125 and that $2,125 would be equivalent to paying $1,500 in rent, because when you rent you don’t get any tax advantages. Or let’s say you had a rent payment of $1,500 and total housing payment of $1,700. In this case you are saving $425 per month by buying vs. renting ($1,700 house payment MINUS $625 tax savings = $1,075). Of course if you are say paying $1,000 in rent and your house payment would be $2,125, then the tax advantages of buying vs. renting might not make sense. Unless you are moving up to a better living space by buying, or if you plan to fix up the house and create equity.
And as mentioned earlier, on top of this standard mortgage interest and property tax deduction that has been around for decades if you buy, is the once in a lifetime jackpot being offered by the U.S Government of $8,000 tax credit for home buyers until April 30th 2010. If you get a 100% VA loan and have the seller pay all your closing costs, this is like getting paid $8,000 to buy a home!
So I hope that helps explain some of the tax benefits of buying vs. renting.
And as always, I like to remind readers of the benefits of using their VA eligibility:
- 100% financing zero down
- Sellers can pay all your closing costs
- With a VA loan credit does not have to be perfect, you may be able to get a VA loan even if your think you have bad credit
- VA loan interest rates are still extremely low
- VA loan home buyers who have VA disability pay get the VA funding fee waived!
- a VA homeloan does NOT have monthly mortgage insurance (unlike FHA and conventional loans with less than 20% down)
- Flexible qualifying guidelines (conventional loans now require a much lower debt-to-income ratio than VA loans
- VA loan limits go up to well above $500,000 for a jumbo VA loan in many counties of California
- Easy VA loan streamline refinances available for who already have VA loans to lower their interest rates
- VA borrowers can get a second VA loan (or even 3rd, 4th, etc…) as long as they have sold or refinanced their old VA loan
Give me a call (858-922-7899) or email (homeloan8@gmail.com) if you have any questions or want to apply for a VA loan.
Warmest Regards,
Rob Chomentowski
Sr. Loan Officer (and VA specialist)
858-922-7899
Comments on this entry are closed.