Walden Pond Apartment Homes Blog

One of the most popular home ownership myths in Lynchburg, VA is that owning a house is a huge tax break as compared to renting.  I don’t know how many times people have personally told me that they want to buy a home because they NEED a tax deduction!  I just shake my head in disbelief because I have done the math.  

If your mortgage interest and other qualifying expenses such as charity contributions aren’t more than the standard deduction, ($11,600 for joint filers in 2011), there is no tax advantage to owning a home as opposed to renting an apartment in Lynchburg, VA.  Assume that you buy a $200,000 house with a 5% downpayment at a 6% interest rate.  Your mortgage interest for the year would be $11,336.  The Standard Deduction for joint filers is $11,600.  

In this example, there is NO TAX BENEFIT.  Even when there is a tax benefit, you most likely paid much more money to maintain the house than you are saving in taxes.  If your mortgage interest is more than the standard deduction and you choose to itemize, there is little to no advantage.  

For example, assume that your mortgage interest in 2011 is $15,000.  You would get to deduct an additional $3400 if you itemize BUT you spent $15,000 in mortgage interest to save $850 on your taxes (assuming 25% tax bracket).    

Don’t forget that you would also have all of the other expenses of home ownership that you would not have incurred when renting an apartment in Lynchburg, VA in an HHHunt community.

So many Americans are wondering if they should buy a home now or rent. Today people think they should own a home. But there is that argument that thinks that for many, renting is better.  While home ownership provides security, it doesn't necessarily give you the returns of equities. Using history as a guide, you can reasonably expect roughly 8% annual gains on your stock portfolio over the long term. House prices, on the other hand, tend to follow the rate of inflation.

Finally, don't forget that even with the tax-breaks of home ownership, you will still be incurring out-of-pocket costs that you wouldn't encounter renting from the cost of ripping down wallpaper to repairing a leaky roof, even gas for the lawn mower. Before you think about buying, estimate how much the costs will be. Don’t put yourself in the position that you are living hand-to-mouth even if it is in your own home.

Draining Your 401(k) for a down payment

Even though it is an option, withdrawing money from your 401(k) to buy a house is a bad idea. Assuming you're not at least 59 1/2 years old, you'll owe taxes plus a 10% penalty. You will also cripple your retirement savings, since most plans won't allow you to contribute to your plan for at least a year following a withdrawal. This means you're going to lose out on your company match as well as future tax-deferred contributions, not to mention the earnings on the money you've withdrawn.

Borrowing from a 401(k) isn't much better. If you leave the company for any reason, you run the risk that your loan will be called immediately. While out of your account, those dollars will also miss out on any market gains, and that tax-deferred growth.

Moving to or within Virginia? Contemplate renting an apartment in Lynchburg, VA. We invite you to contact Walden Pond Apartment Homes for more information.

Excerpts from Smart Money