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The Tax Implications of Buying Your Home

Take advantage of mortgage interest deductions that can lower the amount you pay in taxes. As you've figured out, owning a home is an expensive proposition. Lucky for us, though, there's a silver lining to our little black cloud. What is it? Elementary, my dear Watson! It isn't a Sherlock Holmesian deduction. It's a tax deduction. And it's major.

When you file your federal and state income tax forms, you'll be able to deduct mortgage interest and property taxes (assuming that your loan is for $1 million or less).

So how much is this really going to save you? Well, let's hop on over to our Foolish calculator to find out. It works like this: Let's say that you're in the 28% tax bracket. Let's also say that, once you get your loan, you end up paying $1,000 a month. The interest portion of that $1,000 is tax-deductible -- and, in the early years of repaying the loan, almost all of it is interest. This means (assuming that you have other deductions at least equal to the standard deduction) that it will lower the amount of money on which you pay taxes. And this, of course, means that your tax bill will be significantly lower -- so you'll effectively end up having paid something like $720 a month for that loan. ($1,000 minus 28%, or $280.)

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