Home Loans and Taxes

One of the treasured parts of home ownership is the home loan tax break you may receive. But are tax breaks enjoyed by everybody? Unfortunately, no. Some feel that tax breaks (being able to deduct a portion of your home loan interest to reduce your taxes) actually become a gift from the middle class to the rich.

The reason is many middle-income families don't submit an itemized tax return. In 2004, the standard deduction on a joint return was around $9,700. Only if you exceed that number with itemized deductions will it count towards reducing your tax bill. Then you can "write off" a portion of your home loan interest and real estate taxes. The vast majority of Americans don't live in half-million dollar homes or have thousands of line item deductions. Generally, homes which are valued below $170,000 won't bring you any tax benefits. Kick that number up, though, to the $400,000 mark and over the life of the loan, the homeowner can recover as much as 10% in benefits.

The reason it seems unfair to many homeowners is that the U.S. government, by giving these breaks, is also denying itself of income. It has to find that revenue somewhere else to pay the bills. Thus, the tax break is borne on the back of all Americans while only some - who may be least in need - benefit. Politicians are fond of saying this break frees up capital for the rich to invest in business, which then trickles through the economy.