As national homeownership month wanes, John Tripp of Foundation Trust Mortgage reminds residents of the Bay Area that owning a home is the best step anyone can take, "Because you feel attached to the community and you have a greater sense of responsibility to your neighbors, to the schools, to the betterment of life and everybody.
"By owning a home, you, as a homeowner, are an integral part of the quality of life" said Tripp, president of the Silicon Valley Association of Realtors Board of Directors.
Homeowners not only enjoy a roof over their heads, they have a long-term nest egg investment and are able to save on their taxes because of it. In the last several years, the homeowner's equity gains - in other words, "return-on-investment" - have increased steadily with an average return of more than 20 percent per year because of record increases in home prices.
Homeowners may reduce their taxable income by a sizable amount because of the Mortgage Interest Deduction portion of the federal tax law. For example, a homeowner who has purchased a home at the median price in 2005 would have paid $524,020 for that home. With property taxes at the going rate of about 1 percent of the property value, the property tax deduction for that home would be approximately $5,240 a year.
In the first 12 months, the interest paid on that home loan would total $24,470. (Interest calculated assuming a 20 percent down payment with 5.87 percent fixed-rate mortgage - Freddie Mac.) Therefore, that homeowner's total mortgage interest deduction and property tax deduction for the first year of homeownership would be $29,700. If the owner falls in the marginal 25 percent tax bracket, the total tax savings in the first year of owning the home would be around $7,430 ($29,700 interest paid and property taxes multiplied by the 25 percent marginal tax bracket).
The IRS allows the homeowner to deduct the amount of interest paid on a home loan up to $1 million ($500,000 if married filing separately) as long as the owner includes Schedule A on IRS 1040, the loan is in the owner's name and the mortgage is secured by collateral (usually the home itself - IRS Publication 936). The long-run tax savings would be more than $36,000 if the homeowner holds on to that home for five years (assuming no change in the tax bracket).
Compare two different households - a first-time buyer household and a renter household: The first-time buyer household bought its home during 2005 for $445,400 (assuming 85 percent of the median price in California for 2005). After accounting for mortgage interest and property tax deductions, their taxable income would be $87,150. Assuming no other deductions, total taxes owed to the IRS would be approximately $15,120 (for married filing jointly).
The renter household with the same earnings and marital status would have a taxable income of $105,000 - higher than that of the homebuyer household because the renters do not have any mortgage interest or property taxes to deduct (assuming the standard deduction for 2005 of $10,000). Under these same assumptions (holding all else constant), the renter household pays approximately $19,580 in taxes. Because of the interest and property tax deduction, homeowners are able to reduce their taxable income and achieve almost $4,500 in tax savings.
Tripp said homeowners not only reap well-established tax benefits, but they also bask in the many social benefits homeownership brings to their communities. Studies show high and stable homeownership rates boost the quality of living in education and civic involvement and lower the crime rate and welfare dependency.
"The financial benefits are just a byproduct of the feeling you get of belonging (to a community) because you own a home," said Tripp.