Tax deduction refers to the reduction of taxable income due to deducting tax deductible expenses from it.
The result is a lower tax payable, and possibly even a lower tax bracket.
There are various expense items in a real estate business that qualifies for tax deductions.
But in terms of a mortgage, interest is tax deductible. And it’s one big benefit for advocating buying a home instead of renting one.
However, it must be noted that the tax deductibility of mortgage interest should just be an extra benefit of buying a house.
Some people think that be going down a tax bracket makes taking on a mortgage financially worth it.
The answer is that it’s unlikely.
For example, if an individual has the intention to move down one tax bracket from 40%, the interest paid for mortgage interest will far exceed the tax savings.
The exception is when the borrower has the opportunity to invest in other investments that generate a return higher than the mortgage interest.
In this case, the returns will be more than the interest which allows the borrower to profit from the spread.
And at the same time he benefits from the tax deductions.
Yet, are the profits also taxable?
People who are playing this game should look deep into the numbers to see whether it’s worth the hassle.
And when it is, it can be too tempting to refuse.