The Myth of Tax Deductions
Math doesn’t lie. When you add 1 + 1 you get 2. Subtract 1 from 2 and you get 1. Big surprise right? One of the most common things that I hear people mention when it comes to owning real estate is how important tax deductions are to their financial health. If you employ simple mathematics to this myth, you’ll see how ridiculous the logic is that tell you tax deductions make sense, because they don’t.
Let’s say you owe the bank $100,000.00 with an annual interest rate of 5%, and your income is $30,000/year. 5% of $100,000.00 is $5,000.00. That means at the end of the year, when you file your taxes, you’ll be able to reduce your taxable income from $30,000.00 to $25,000.00.
On a $30,000.00 annual income, you fall in the 15% tax bracket. $5,000.00 of your annual income was paid to the bank, and you’ll never see it again. The real savings to you in this example, since your tax bracket is 15%, is 15% of $5,000.00 which is $750.00.
In short, you spent $5000.00 to save $750.00. Your net result is a loss of $4250.00 in real cash. If you think that keeping your home mortgage means that you’ll benefit because you’ll be able to take a write-off, I’d be happy to pay you $750.00 as soon as your check to me for $5000.00 clears the bank.