The Tax Benefits of Homeownership
Here is an interesting study from NAHB concerning the tax benefits of homeownership, a perfect post to add to our coverage of National Homeownership Month. While it gets a bit technical, it generally talks about how purchasing a home is typically the largest purchase and among the most important financial decision a family makes, and that among the most important are the tax benefits that help offset some of the cost of homeownership.
Using the methods developed in the paper, a household, for example, with $80,000 in annual income who obtains a $200,000 mortgage will save on average $1,765 in the first year of homeownership. By the end of the fifth year of homeownership, the household will save on average $8,607 on taxes, and this amount grows to $19,488 by the end of the average period ownership — twelve years. This stylized homeowner can expect to save $21,650 in capital gains taxation, yielding a total benefit of $41,138 over the expected period of homeownership. Further, the paper provides variants of these calculations if the analysis allows the homeowner’s income to increase with their age and labor market experience. For example, the five-year tax savings for this homeowner increases to $9,723.
The article also discusses the new $8,000 first-time home buyer tax credit which increases the estimates in each of these tables on average by $8,000, a significant increase in the tax savings of the first five years of homeownership. For example, for a homebuyer with an income of $70,000 who obtains a mortgage $200,000 the tax savings increase from $7,718 to $15,718 — an increase of 104%. Or as another example, a homebuyer with $80,000 in income and a $200,000 mortgage can expect his/her five-year tax savings estimate to increase 82% from $9,723 to $17,723.
The combination of the standard tax benefits of homeownership combined with the temporary tax credit makes 2009 an attractive time period to purchase a home.
Using the methods developed in the paper, a household, for example, with $80,000 in annual income who obtains a $200,000 mortgage will save on average $1,765 in the first year of homeownership. By the end of the fifth year of homeownership, the household will save on average $8,607 on taxes, and this amount grows to $19,488 by the end of the average period ownership — twelve years. This stylized homeowner can expect to save $21,650 in capital gains taxation, yielding a total benefit of $41,138 over the expected period of homeownership. Further, the paper provides variants of these calculations if the analysis allows the homeowner’s income to increase with their age and labor market experience. For example, the five-year tax savings for this homeowner increases to $9,723.
The article also discusses the new $8,000 first-time home buyer tax credit which increases the estimates in each of these tables on average by $8,000, a significant increase in the tax savings of the first five years of homeownership. For example, for a homebuyer with an income of $70,000 who obtains a mortgage $200,000 the tax savings increase from $7,718 to $15,718 — an increase of 104%. Or as another example, a homebuyer with $80,000 in income and a $200,000 mortgage can expect his/her five-year tax savings estimate to increase 82% from $9,723 to $17,723.
The combination of the standard tax benefits of homeownership combined with the temporary tax credit makes 2009 an attractive time period to purchase a home.
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