Finance Blog

Tax Differences between Buying and Renting

Written by Eva Rosenberg on June 8, 2011 in Tax  |   No comments

Tax Differences between Buying and Renting By Eva Rosenberg, EA Owning your own home is part of the American dream. But according to a recent Wall Street Journal article, owning a home is not always the best idea. Some Americans who cashed in on the…

Tax Differences between Buying and Renting
By Eva Rosenberg, EA

Owning your own home is part of the American dream. But according to a recent Wall Street Journal article, owning a home is not always the best idea.

Some Americans who cashed in on the $8,000 first-time home buyers credit before it expired in April 2010 got a bad deal. The credit pushed up sales prices, which then dropped dramatically when the buying frenzy ended. The WSJ article states that the median home value has fallen by $15,000 from 2010 to 2011.

So is it better to rent a home than buy? That’s not always the case, either. Did those people whose home values dropped by $15,000 really lose out? Let’s look at the tax benefits for a residential homeowner.

Consider a Midwestern family of four who bought a three-bedroom house they could afford. Suppose they got a thirty-year, $200,000 loan with 4.5 percent interest, for a monthly payment of $1,015. Add in an estimated average property tax of $1,625 and insurance of $1,200 per year, and the total annual lodging expense would be around $15,000—or $1,250 per month.

In this scenario, $13,500 worth of mortgage interest and property taxes would be deductible. Folks in a combined federal and state tax bracket of 30 percent would save $337.50 per month. After taxes, that home would cost them $912.50 per month.

How much would a similar home cost to rent? Looking at the area around Chicago, Ill., we can find two- to three-bedroom homes available for around $1,500 per month. Taking into consideration the tax benefits for homeowners, renting a home would have cost the family $7,000 more per year than owning one.

Even after a drop in value within the first year, the family came out just about even between renting and buying. Families who buy homes they can afford tend to stay in those homes for a decade or more. In the long run, the prices rise, and the loan balance declines. When they get ready to sell in ten to thirty years, they walk away with a profit.

People who select homes where the monthly mortgage, property tax, and insurance payments are no more than 15–30 percent more than their rent will always fare well in the long run.

What If You Have a Home Office?

If you have an office in your home, things get a little more complicated. In fact, in this situation, sometimes you’re better off renting a home than being a homeowner. Why?

As a renter, you don’t have to deal with depreciation or the complicated calculations related to the taxable part of the profit when you sell the house. You simply deduct the business portion of the rent, utilities, insurance, and any other relevant costs.

As a homeowner, you get the full deduction for the mortgage interest and property taxes, even without using the house for business. So what else do you get to deduct? You get to deduct the business percentage of the utilities, maintenance, insurance, and association dues or maintenance fees.

The typical additional deductible expenses amount to about $1,500 for a business using about 20 percent of a home. Using the same federal and state tax rate of 30 percent, the additional tax savings for the homeowner’s home office is about $500 per year. When your business shows a loss, you might have to suspend that deduction and save it for future years.

So—Rent or Buy?

The answer is different for every family, in every market. With interest rates the lowest they’ve been in generations, it’s certainly worth seeking a home to buy.

Read More:

Skip the Allowance and Hire Your Child
Celebrity Tax Scandals
Temporary Work for Fun, Profit, and Retirement
How to Ensure You Get Audited
Medical Tax Deductions Are Worth More Than You Think

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.

No comments yet

Leave a Comment

Name :

Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.

Tax Archive

Stay Informed Sign up for our FREE Equifax email Newsletter