Property Tax vs Tax Deductions?
April 21st, 2010I plan to buy a home soon, but am utterly confused as to why you have to pay property tax but then get deductions on your taxes for owning a house. I realize that every state and person is different, but generally do the two even eachother out?
If I was to get taxed about 30% of my paycheck (because I have no dependents and no other write offs) and I was to buy a 0,000 house, could I expect that I would end up ahead on my taxes?
Oh, this is in California by the way.
Like I said, I’m assuming my taxes are usually 30% of my income. The home is in California. And the interest rate of the 400,000$ home is about 5.25%.
Is there an easy way to calculate all that?
Replys
Property tax goes to your county (or city sometimes) and is related to the value of your property and the services you allegedly receive from the county (or city).
The tax deduction is based on the interest you pay to finance the house. If you, say, inherit the house – no tax deduction, but you still pay property tax.
The tax deduction usually outweighs they property tax, although that depends on the value of the house, property tax rate, your income and your income tax rate.
You get to deduct the amount of interest you pay on your mortgage when you do your taxes. So yes, by owning a home and paying interest on a mortgage, you will pay less income taxes than you do now. However, you will have to pay property taxes on that house!
Whether you end up ahead or not totally depends on what state you live in, how much your mortgage is and what interest rate you pay, and what, if any, other deductions and/or tax credits you have.
It’s true that you can deduct most property taxes from your federal income tax, and also the interest paid on your mortgage. But your tax refund wouldn’t necessarily equal the amount of the taxes and mortgage payments. The deductions lower your total income that is used to determine the income tax. The deductions are not a rebate of money paid.
The deduction for taxes and for interest on a mortgage is designed to encourage home ownership.
The property taxes themselves go to your local goverment(s) for their operation.
The property taxes are paid to your local area, maybe city, county or school district. Congress wants to encourage home ownership, so allows you to deduct those taxes from your federal tax return. And no you don’t break even on it – your tax savings on the federal return is much less than the amount of property tax you pay and deduct. If you are getting taxed around 30% total of your paycheck, you are probably in a 15% tax bracket – if you are, and pay $1000 in property tax you might save $150 on your federal income tax. No, you’d never come out ahead by being able to deduct the tax.
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