What's our biggest tax break?

It's home ownership. Nothing else comes close.

Home mortgage interest is tax deductible. So are property taxes. When you sell the house, your capital gain is tax-free. The Tax Policy Center at the Brookings Institute estimates mortgage interest deductions will cut federal income tax bills $66.1 billion this year. Property tax deductions cut another $23.6 billion. 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 that large benefits last forever.

But they are wrong. For the majority of Americans, home ownership tax benefits are small and temporary--- or non-existent.

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 15 percent tax bracket, and you just bought a median priced house---$161,600 according to the National Association of Realtors--- with a 3 percent down payment.

How much are your tax savings?

The answer depends on how much you pay in interest and real estate taxes. With a new 5.5 percent 30-year mortgage your first year interest payments would total about $8,569. Your real estate taxes might be about $3,555. That's a hefty $12,124.

Couples that don't itemize have a standard deduction of $7,950 this year. Homeownership deductions only benefit you when they exceed the standard deduction. Since your itemized deductions exceed the standard deduction by $4,274 your tax saving would be $641 in the first year.

The standard deduction, however, is indexed to inflation. As a result, future tax benefits are usually smaller than first year benefits.

How much smaller?

Lots.

I calculate the second year tax savings at $604. The third year savings are $565.   By the fourteenth year your tax benefit is $10. That's nearly enough for three lunches at McDonald's. Your tax benefit for all 14 years is $4,930. That's 3.10 percent of the original purchase price.  

Bottom line: for most Americans home ownership deductions are nice. But that's all.

If you'd like to check your personal tax benefits, visit to my 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. Then it calculates your annual and cumulative tax benefits. (You can estimate your marginal tax rate on Yahoo at: http://taxes.yahoo.com/rates.html.   You can calculate how much house you can afford on Homefair.com at: http://www.homefair.com/homefair/usr/qualcalcform.html. )

Using the Home Ownership Tax Benefits Calculator, here are some estimates of tax benefits for different levels of income and home price. In each case I've assumed a minimum down payment of 3 percent.

•  A $30,000 couple qualifies to buy a $98,700 home but receives no tax benefit. Their deductions are less than the standard deduction. They are in the 15 percent tax bracket.

•  A $40,000 couple qualifies to buy a $126,500 home. Their tax benefits will last for 7 years and total $878 or 0.7 percent of the homes' original value. They are in the 15 percent tax bracket.

•  A $50,000 couple qualifies to buy a $154,400 home. Over the next 12 years their tax benefits will total $3,884 or 2.5 percent of the homes' value. They are in the 15 percent tax bracket.

•  A $60,000 couple qualifies to buy a $178,300 home. Over the next 16 years their tax benefits will total $7,693 if they are in the 15 percent tax bracket. The savings will be $13,847 if they are in the 27 percent tax bracket. (Their tax bracket will depend on the number of personal exemptions they have and how much they contribute to qualified plans.)

•  A $70,000 couple qualifies to buy a $205,500 home and is usually in the 27 percent tax bracket. Over the next 20 years their tax benefits will total $23,508 or 11.4 percent of the homes' value.

•  An $80,000 couple qualifies to buy a $232,600 home. Their tax savings will total $34,600 over 22 years or about 14.9 percent of the homes' value. They are in the 27 percent tax bracket.

Homes priced at $105,000 or less have no tax benefits.   At a 4.5 percent interest rate--- currently available for a 5/1 adjustable mortgage--- homes under $125,000 have no tax benefits.

Does this mean we shouldn't want to own a home? No. It just means we ought to be realistic about the tax benefits.

Calculate Your Tax Benefits

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