The Standard Line

The standard line goes something like this:

Borrower: "Wow, the loan on this house is going to cost us $2,000 a month.

We're only paying $1,350 for rent." Realty Agent: "Oh, don't worry. Remember, in the early years nearly all of that payment goes to interest. And you can deduct interest from your tax return. If you're in the 30 percent tax bracket, your after-tax monthly cost will total around $1,400 (.7 x 2,000). Considering the great advantages of buying your own home—especially appreciation—owning actually costs you about the same as rent."

Like sales agents, I strongly advocate home ownership and investment in property. But get the numbers right. Agents and loan reps overstate the value of those interest tax deductions. Unless your taxable income exceeds $114,650, you're not in the 30 percent tax bracket. The majority of taxpayers pay effective income tax rates of 15 to 25 percent.

On the other hand, if you're among the fortunate whose taxable household income exceeds $114,650 a year, your combined state and local marginal tax rates will push you above 30 percent; however, you face another problem. Above $100,000 a year, the government thinks you're too rich to deserve the full benefit of the interest deduction. At that income level, the government starts slicing back the amount you can deduct.

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