Name the biggest tax break most people get.

Didn't have to think very long, did you?

It's home ownership. Nothing else comes close.

The interest you pay on your home mortgage is deductible. So is what you pay in local property taxes. Then, when you sell the house, your capital gain is tax-free. Home mortgage interest deductions, will cut federal income tax bills $66.1 billion this year, the Tax Policy Center at the Brookings Institute estimates. Property tax deductions will lop off another $23.6 billion. And home sellers will enjoy $20.3 billion in tax savings on capital gains. That's $110 billion in homeowner tax breaks.

Millions of people are so enthusiastic about home ownership they assume they are receiving a very large benefit. Better still, they're sure the tax savings are like an annuity they will be receiving for years, for as long as they have a mortgage or own their home.

In fact, neither is true.  

As you will soon see, how much you benefit depends on your income, your marital status, the amount you finance, and the interest rate you pay. How long you benefit also depends on the price of the house, how it is financed, and your marital status.

Suppose, for instance, that you are married, in the 27 percent tax bracket, and you just bought a median priced house---$161,600 according to the National Association of Realtors--- with a 20 percent down payment.   How much would you income tax bill be cut?

To get the answer you'd need to know a few things. Like how much you'd pay in interest and your real estate tax bill. With a new 5.5 percent 30-year mortgage your first year interest payments would total about $7,067 and your real estate taxes might be about $3,555. That's a total of $10,622.   Hefty. Lots more than most people put into their 401(k) plans.

Couples filing joint returns that don't itemize their taxes, however, are allowed a standard deduction of $7,850 this year. Your homeownership deductions will only benefit you if they exceed the standard deduction. Since your $10,622 in deductions exceeds the standard deduction by only $2,772 your actual tax saving will be $748.

But that's only for the first year.

The standard deduction is indexed to inflation. It rises each year. Your mortgage interest, meanwhile, declines each year and your real estate taxes generally rise. As a result, future tax benefits tend to be smaller than first year benefits.

How much smaller?


I calculate the second year tax savings at $687. The third year savings are $623.   By the eleventh year your tax benefit is down to $6.

Yes, you read that right. Your total tax benefit is $6 in the 11th year. That's nearly enough for two lunches at McDonald's.

Your total tax benefit for all 11 years is $4,401. That's 2.70 percent of the original purchase price of the house.   If you're in the 15 percent tax bracket--- a taxable income under $47,450 for 2003--- your first year tax saving is only $416. Your benefits total only $2,445 over 11 years. That's only 1.5 percent of the initial value of the house.

Home ownership deductions are nice. But that's all. Nice.

If you'd like to check your personal tax benefits--- or are thinking of buying a house--- I suggest a visit to my new Home Ownership Tax Benefits Calculator. It allows you to enter different assumptions about home price, down payment, interest rate, property taxes, and your personal tax rate and calculate your annual and cumulative tax benefits.

Using the Home Ownership Tax Benefits Calculator, I found that single taxpayers in the same tax bracket received a larger tax benefit for a longer period of time. This happens because their standard deduction is lower, $4,750, so they start collecting tax savings earlier than married couples filing joint returns.

Taxpayers who bought a median priced house and filed joint returns, for instance, would enjoy tax savings for 11 years. The tax savings have a total value of $4,401, or 2.70 percent of the initial price of the house. A single taxpayer in the same tax bracket, however, would enjoy tax benefits for 24 years. Her savings would have a total value of $23,198, or 14.40 percent of the initial price of the house.

Next: Tax savings and where you live