Purchasing a home is a life-changing moment and should not be taken lightly. Sacramento, California, has recently been predicted by some to be one of the hottest real estate markets in America come 2021. Although only time will tell if this is true, this is welcome news for both current and prospective Sacramento homeowners since those searching for a home may be inclined to act now. Real estate professionals make many points as to why buying a home can be financially beneficial. One of the most common points is the tax write-off received from mortgage interest paid on a home. Although this is true, how much of a write-off are you truly getting? 

If you are single and can afford it, purchasing a home comes with a significant tax benefit. However, if you are a married couple, the tax benefit should be more closely examined. First, we will look at how write-offs work.

In 2020, a married couple will get $24,800 in deductions, known as the standard deduction. That means a couple’s itemized deductions need to add up to more than $24,800. In 2017, the TCJA limited state and local taxes to $10,000. If you own a home in California, this threshold is filled easily due to property and California-specific taxes. That leaves this couple with $14,000 in additional write-offs such as mortgage interest. But what if they have a $450,000 mortgage at 3% per year, equating to $13,500 in mortgage interest? In this case, they would still take a standard deduction because the $24,000 given in deductions is greater than the write-offs accumulated throughout the year.

S.A.L.T Limit:             $10,000
Mortgage Interest: +$13,500 
                                     $23,500 < $24,800 standard deduction.

What if your write-offs are greater than the $24,800 standard deduction? Those in the 24% tax bracket who have $30,800 in write-offs, or an additional $6,000 in mortgage interest, would receive $1,440 in tax benefit from their mortgage. 

Total Write-Offs:      $30,800
Standard Deduction: -$24,800
Add’tl. Write Off:     $6,000
Tax bracket (24%)     x .24 
Total Tax Savings:    $1,440 (federal)

If you consider a 9% tax for the state, there at most is an additional $540 in write-offs. (not including the state’s standard deduction) What you are able to itemize on your federal taxes changed a lot in 2017, and the write-off for mortgage interest was altered in more ways than one. 

Our job at Twin Rivers is to ensure our clients understand how their financial decisions will affect them in the future. If you are considering purchasing a new home or know someone about to buy a home, please do not hesitate to reach out to our team for an analysis. We want you to be sure you are making a commitment to being a homeowner for the right reasons.