Get Home Loan for Tax Deduction?

We’re often asked “Should I get a home loan/mortgage for an added tax deduction?” While this question has many layers, most often the answer is that you should not. We dive in deeper below…

​Trading $1 for 30 Cents
Mathematically and looking at it from simply the tax perspective of a deduction, having a loan for the tax benefits doesn’t make sense. This is where it’s important to understand the difference between a credit and a deduction. Paying $1 in mortgage interest for a deduction, that essentially nets your effective tax rate (likely in the neighborhood of 30 cents), doesn’t pencil out. Ask anybody if you can give them a dollar in exchange for 30 cents and you’ll have a mile-long line waiting for the opportunity!
 
Not Everybody Itemizes
Mortgage interest is an itemized deduction on tax returns. So folks who take the standard deduction don’t even end up benefiting from their mortgage interest paid. Here’s where it pays to understand itemizing vs. taking the standard deduction.
 
Even Itemizers Might Not Fully Benefit
Tax laws are always changing. For example, The Tax Cuts & Jobs Act of 2018 changed the mortgage interest deduction rules for the 2018-2025 tax years. Most notably, mortgage interest is only deductible up to $750,000 in total mortgage indebtedness. So for folks with $1,000,000 home loans, only 75% of their mortgage interest is deductible. This includes 2nd homes. So if you have a $500,000 mortgage on your primary home, and are looking to buy a 2nd home with a $500,000 mortgage, that 2nd home mortgage interest will only see you getting ½ the interest deduction.
 
Investing Purposes
While I’m not suggesting you implement acquiring a mortgage in order to use those funds for investments, some folks believe in this and like to use this strategy, so I’ll briefly discuss here.
 
Rental property investors commonly like to use OPM (Other People’s Money). It fundamentally means acquiring mortgage debt in order to leverage the ability to purchase more investment properties. So for an investor who has $200,000 to purchase rentals, that investor could use OPM and acquire 2 homes valued at $200,000 each, with putting $100,000 down on each property (acquiring $100,000 mortgage)…versus purchasing one $200,000 home with all cash. In this case, the mortgage allowed the investor to purchase two properties vs. one.
 
Some also believe that mortgage interest provides the best opportunity to Arbitrage (borrow at a lower rate to invest at higher earnings rates). They’ll site the S&P historical return average is much higher than lower rates. This comes with tremendous risk, but also potential huge benefits. Click here for more discussion on that topic.
 
So ultimately, you likely shouldn’t get a home loan/mortgage for an added tax deduction, but it may make sense to get one so you can leverage those funds for other opportunities. Some find this makes sense in their situation due to the low rates mortgages often provide compared to other financing.
 
Feel free to contact us regarding your specific situation, we’re happy to help!