First Time Homebuyer – Buy or Rent?


Tax Issue

Home ownership is a dream of many Americans. Whether it is economically more beneficial to rent or buy depends on many variables, including whether home values are rising or falling, how long the individual plans to stay in one location, and whether or not the individual is willing to take on the responsibility of maintaining the upkeep on a home. However, the tax benefits available to homeowners can provide significant savings. The advantages of owning or renting are different for everyone so each individual’s situation needs to be evaluated before making the decision.


Applicable Tax Law

  • Real estate taxes are deductible as itemized deductions if the taxpayer owns the real estate and the taxes are based on the assessed value of the property.
  • Premiums paid for acquisition indebtedness for mortgage insurance contracts after December 31, 2006 and before January 1, 2012 may be treated as deductible mortgage insurance.
  • Home mortgage interest paid, including acquisition debt and home equity debt, may be deductible as an itemized deduction.
  • Deductible points paid at closing to purchase a home are generally deductible as mortgage interest.
  • If the seller pays points, the buyer is treated as having paid the points for purposes of an itemized deduction.
  • Individuals can exclude up to $250,000 ($500,000 MFJ) of gain on the sale of a qualifying principal residence.

Tax Planning Strategies

One way to help a taxpayer decide whether they should buy or rent is to calculate how much he or she will have to pay each month if they purchase a home and compare it with how much they would have to pay to rent the same home. It is important to compare similar properties. Comparing a single-family home with an apartment will not be useful. It is also important to remember that home ownership entails additional housing expenses that a renter would normally expect the landlord to cover. These expenses include property taxes, homeowner’s insurance, utilities, and home maintenance. Do not neglect to factor in the tax savings that owning a home will generate in the form of possible itemized deductions for mortgage interest and property taxes paid. Also, a home may appreciate over the time the taxpayer holds it, generating a possible gain on its sale which may qualify for a tax exclusion if the taxpayer otherwise qualifies.



 Nick is currently paying $900 per month in rent. He has found a home he would like to buy for $200,000. He will put 10% down on a 30-year mortgage at 5% fixed interest rate. His yearly property taxes will be 1% of the property’s value annually. Home values have been increasing in the neighborhood at a rate of about 2% per year. Nick is currently in the 28% tax bracket. If Nick spends only two years in the area, he would be better off economically to continue renting. However, with these assumptions, he would be better off buying the home if he stays in it for only one more year. After three years, the tax savings will have made buying the home the better economic decision.


There are several “Buy vs. Rent” calculators available online. By factoring in several other variables, such as anticipated maintenance costs, property appreciation, and the lost opportunity cost of investing the down payment in another savings vehicle, these online tools help analyze the costs/benefits over a number of years. Results will vary depending on the complexity of the calculator and the number of variables allowed.


Possible Risks

  •  If circumstances change, such as a job change or the neighborhood becomes undesirable for some reason, it’s easier for a renter to move on short notice.
  • A homeowner is responsible for the time and money required for the home’s maintenance. Maintenance on a rental property is usually covered by the landlord.
  • If it becomes necessary for a homeowner to sell the house at a time when the housing market is depressed, he or she could lose money on their investment. A loss on the sale of a principal residence is not tax deductible.
  • Potential tax benefits, such as deductions on mortgage interest and property taxes, may not be significant if the taxpayer doesn’t have enough other deductions to itemize them on his or her individual income tax return.