The Maximum Mortgage Tax Deduction Depends On Income

Victorian San Francisco HouseThe US government has blessed us with the ability to deduct our mortgage interest expense from our income, thereby lowering our tax liability. If you go to Canada, Australia, Asia, and Europe, there is no such benefit. At least they’ve got cheap healthcare!

Given the US has a progressive tax system, the higher your income, the more valuable your mortgage interest income deduction. Homeownership with a mortgage is absolutely the best tax shield for everyday folks out there. I knew my income would rise over time and wanted to match the timing of my home purchase when I entered the 28% tax bracket.

Take a look at the latest marginal tax rates for singles and married couples.

Single Filing Status For 2014

  • 10% on taxable income from $0 to $9,075, plus
  • 15% on taxable income over $9,075 to $36,900, plus
  • 25% on taxable income over $36,900 to $89,350, plus
  • 28% on taxable income over $89,350 to $186,350, plus
  • 33% on taxable income over $186,350 to $405,100, plus
  • 35% on taxable income over $405,100 to $406,750, plus
  • 39.6% on taxable income over $406,750.

Married Filing Jointly or Qualifying Widow(er) Filing Status For 2014

  • 10% on taxable income from $0 to $18,150, plus
  • 15% on taxable income over $18,150 to $73,800, plus
  • 25% on taxable income over $73,800 to $148,850, plus
  • 28% on taxable income over $148,850 to $226,850, plus
  • 33% on taxable income over $226,850 to $405,100, plus
  • 35% on taxable income over $405,100 to $457,600, plus
  • 39.6% on taxable income over $457,600.

What’s important to note is that if you are in the top tax bracket, you get 39.6 cents back for every one dollar in interest you pay on your mortgage.

If you also pay State tax, you can see how your marginal tax rate can easily reach 45% on your last dollar of income earned! The beauty of the mortgage interest deduction is that it applies to your marginal income, and therefore your highest marginal tax rate.

For those in the 15% Federal tax bracket or below, I would not rush to buy a home. There are more costs to ownership that just a mortgage and property taxes and you’ll qualify for the standard deduction. When you’re in the 25% marginal tax bracket, that’s when homeownership starts making more sense provided you follow the 30/30 rule for home buying.

HOMEOWNERSHIP IS WORTH MORE TO HIGHER INCOME EARNERS

Example #1: Say you earned $588,350 in 2012. Your income from $388,350 to $588,350 will be taxed at a 35% Federal Tax rate.  If you paid $50,000 in mortgage interest for 2012, you get to reduce your taxable income by $50,000 from $588,350 to $533,350. As a result, you are paying $50,000 X 35% = $17,500 less in Federal taxes!

Example #2: Say you earned $85,500 in 2012. About $50,000 of your income will be taxed at a 25% federal tax rate. If you somehow managed to pay $50,000 of mortgage interest for 2012, your taxable income is only $35,500. As a result, you are paying $50,000 X 25% = $12,500 less in Federal taxes.

Analysis: As a lower income earner, the mortgage interest tax shield is worth $5,000 or 29% LESS than someone who makes more, even though the lower income earner paid the same amount of mortgage interest! One can therefore conclude that owning a home with a mortgage is more beneficial for those who have higher incomes. One can also conclude there is an asymmetric benefit for those who have higher incomes.

INCOME PHASEOUT WARNING

In a perfect world, the above example will hold true. Unfortunately, we live in a world where the government discriminates between different income groups. The rules are complex and have created massive multi-billion dollar industries to help decipher and administer such rules e.g. tax law, tax help, accounting.

If you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. Talk about another overly complicated rule the IRS/government has implemented!

Example: You make $266,800 and you have $50,000 in mortgage interest deductions. Take $266,800 – $166,800 = $100,000. Then take $100,000 X 3% = $3,000.  Finally, take $3,000 X 33.3% = $999. You can now only deduct $49,001 ($50,000 – $999) from your income instead of originally $50,000.

In my example of the person making $588,000 and paying $50,000 in mortgage interest for the year, the homeowner can only deduct about $45,800 given the phaseout. As a result, the homeowner has to pay $2,000 more in taxes.

Note on The Alternative Minimum Tax: The A.M.T. bars any deduction for interest payments on a home equity loan when loan proceeds are used for purposes other than home improvements. Regardless of your income, you can deduct the mortgage interest. However, deductions for property taxes and for state and local income taxes and exemptions for the taxpayer and dependents must be added back to arrive at the taxpayer’s alternative minimum taxable income. If the tax to be paid using this method is higher than that from the regular computation, the higher amount must be paid.

THE BEST INCOME TO MATCH THE IDEAL MORTGAGE AMOUNT

Given the analysis, I say the ideal income a homeowner should shoot to earn is roughly $300,000 per married couple or $250,000 per individual. $250,000-$300,000 is a high enough income to allow for a good life, no matter where you live in America.  With a mortgage interest deduction among other deductions, you can bring your AGI down to $200,000 to $250,000 to fly right under the radar of the government’s income threshold to increase taxes.

I used $50,000 in mortgage interest for simplicity purposes. However, given one can now get a 5/1 ARM jumbo mortgage for 2.625% or a 30-year fixed jumbo mortgage for 3.65%, a more appropriate mortgage interest number is $26,250 – $38,750.

Why do I use $26,250 – $38,750? It’s because the ideal mortgage amount one should have who is making roughly $250,000 – $300,000 is about $1,000,000.  The law stipulates that $1,000,000 is the maximum mortgage interest indebtedness one can have to be able to deduct the interest from their incomes.  Any more is disallowed.  You can take a $100,000 HELOC to use towards the improvement of your home and deduct that interest, but that gets messy and is open for interpretation.

There have been lots of talks by the government to limit the mortgage interest deduction to the 28% tax bracket ($178K for singles, $217K for married couples). Therefore, if Federal taxes are raised and the interest deduction is lowered, the ideal income is probably closer to $225,000 for singles and $275,000 for couples. With this income level, the largest mortgage I recommend is $900,000.

Post Review

* Homeownership is worth more to higher income earners, but only up to a point.

* Mortgage interest phaseout starts at $166,800 and has a maximum phaseout of 80% of the mortgage interest.

* The ideal income to earn for homeowners is around $250,000 for singles and $300,000 for couples.

* Earning more than $250,000-$300,000 doesn’t do much to improve happiness.  Might make you mad due to higher taxes.

* The ideal mortgage amount for the ideal income is therefore around $750,000 – $1,000,000 (3-3.5X income).

* The US government is pro homeownership, therefore take advantage of the benefits.

* You get $250,000 in tax-free profits if you sell your house and are single, double the amount if you are married.

* Single filers get a standard deduction of $5,950 (roughly double for married couples) for 2012.  The government allows you to automatically choose between standardized or itemized, whichever is greater.  Given we are talking about $1 million dollar mortgages as the ideal mortgage amount, itemized deductions will always be chosen.

* Check out this excellent mortgage interest tax deduction calculator. You’ll learn that not only is mortgage interest and charitable contributions tax deductible, state, local, and foreign income and personal property taxes are also tax deductible.  See IRS website for a list of deductible taxes.

Note: I am not a real estate lawyer or accountant. But, I do have a multiple property portfolio valued at well over $3 million dollars and have spoken to many accountants and real estate lawyers about this subject. I am an active manager of lowering my tax bill and building wealth for the long run. 

Recommendations For Saving Money And Increasing Your Wealth

1) Check Your Credit Score: The average credit score for rejected mortgage applicants is 729. How do you stand? You can check your credit score for free at GoFreeCredit.com. I highly recommend it because you don’t want to caught with your pants down not knowing what your score is if you have a late payment. I had no idea I had an $8 late payment for a utility bill from two years ago that crushed my score from 790 to 680 and caused massive delays in my latest mortgage refinance.

2) Refinance Your Mortgage. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

3) Manage Your Finances In One Place: Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and when my CDs are expiring. Their best feature is their Portfolio Fee Analyzer which is saving me $1,700+ in annual fees I had no idea I was paying. It takes less than one minute to sign up and it’s free.

Photo: Pacific Heights Mansion, 2014.

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

    • says

      Yeah, and that’s what makes our housing bubble even more laughable. There were huge tax incentives to pile into American real estate. The US even has 30-year mortgage rates! In Canada, you can’t deduct your mortgage interest (save for the Smith Maneuver) AND the longest rate you can get is 10-years (but it’s egregiously high). Our bubble is wavering now. Soon we’ll learn we’re not actually better than America.

      • says

        Good luck on the Canadian housing bubble folks! Just make sure you can afford to pay the payments in case something happens.

        If we all could pay the payments in the US, we’d still be partying!

  1. says

    Good analysis. I would add that (to the best of my memory) you can also deduct interest generated from up to a 100,000 HELOC loan. All of these rules are subject to change if Congress actually overhauls the tax code though.

  2. says

    That was a very good post! I have never put much thought into how much the mortgage interest tax deduction allows for various income levels.

    But to answer your question….I think that the perfect mortgage amount is “zero” and I think the perfect income level is “as much as possible.” I don’t want to be a mortgage slave. I want to retire as soon as possible!!!!! =)

    • says

      Too idealistic Holly! IF you have as much income as possible, you are going to be paying out the WAZOOOOOO in taxes! When the city takes 1 month to fix the electricity pole, you’ll get pissed!

      $300,000K/$1 million is the perfect balance.

      • Elbow says

        I think Holly has a point.

        In your example of the $50,000 you paid in interest, you are still out that $50,000. It’s just profit for the bank. If you did not pay that $50,000 you would have been able to keep $32,500 ($17500 would go to taxes at 35%)
        .
        So you are spending $50,000 to make $17500 back on your taxes?

        It doesn’t make sense to me, unless I am missing something?

  3. Max says

    You miss some additional breaks that are possible to get for low income homeowners. For example, the Mortgage Credit Certificate (MCC) program. The benefits differ by state. Here in NYS, I was lucky enough to get one before they did away with them last year and when I still qualified for income purposes. As a result, I get to deduct dollar-for-dollar the first 20% of my mortgage interest for the life of the mortgage, and then the remaining 80% qualifies for the regular mortgage interest deduction. This is some very real savings on a $400K mortgage (saves 0.95% off my rate annually in my case)! However, with how much rates have come down, it is only finally starting to make sense to refinance (as I will lose the credit on refinancing) and I’m looking to shorten to 15yr fixed or 5/1 ARM.

      • Max says

        I actually recall the state upper limit to be more like 70K, which I was just under at the time I took out the mortgage in 2010 (based on my 2009 tax return), but had just switched jobs during the spring and the bank qualified me for my mortgage based on my offer letter (and new pay stubs as they came in). So a few months earlier and I would have never gotten the mortgage; a few months later and I would have not qualified for the MCC. Somehow I hit the sweet spot and just barely got the $8K first time homebuyers credit too.

        • says

          That’s pretty cool the government is encouraging folks to spend 5.8 times their gross income on a mortgage!

          If this is really the case, then it truly does pay to be a homeowner, b/c the government will always bail us out if we get in trouble! 5.8X, WOW!

        • Max says

          Hahaha, yep, 2005-7 all over again, why do you think we got into this mess in the first place? I’ve been working hard to improve that ratio from 5.8 (2009) to 4.2 to 3.7 to 3.0 (2012 expected), not including non-cash bonuses or a passive stream that is starting to come in this year, but I expect my case is a bit different than average.

  4. Mike Hunt says

    Hi Sam,

    That is some great analysis.

    One question- how does AMT effect the mortgage deduction?

    -Mike

    • says

      Here you go:

      Note on The Alternative Minimum Tax: The A.M.T. bars any deduction for interest payments on a home equity loan when loan proceeds are used for purposes other than home improvements. Regardless of your income, you can deduct the mortgage interest. However, deductions for property taxes and for state and local income taxes and exemptions for the taxpayer and dependents must be added back to arrive at the taxpayer’s alternative minimum taxable income. If the tax to be paid using this method is higher than that from the regular computation, the higher amount must be paid.

      AMT affects almost all homeowners with mortgages and adjusted incomes over $100,000 nowadays.

      • Mike Hunt says

        Thanks- normally AMT is limiting the deductions so this makes sense. I guess if the property taxes are high this will make for a worse effect.

  5. says

    Also, move to a high tax state? Your benefit is more, plus your state tax paid means you itemize every year! For the AMT questions: a mortgage is still deductible, it’s the HELOC that gets iffy.

  6. Travis says

    The 3% income phaseout does not take effect until 2013, at which time highest marginal rate is set to jump to 39.6%. Of course this all depends on the election results. Moral of the story, always crunch the numbers.

  7. says

    What would you trade or keep – cheap healthcare or tax deductible mortgages?
    The election will indicate this a bit I think. Even though I don’t follow US politics closely, I think Obama will prevail.

    • says

      Good question. For now, I would MUCH rather have tax deductible mortgages b/c of my income and mortgage amount. Once the mortgage is done, and I plan to get my income comfortably below the “attack” level by the government, then I’ll go for cheap healthcare.

  8. says

    Wow, seriously? I would not be comfortable with my housing cost being 30% of my gross income. Right now, it’s under 20% of my gross base salary and that’s about the most I’m comfortable with.

    I tried to keep my housing choices separate from my income and looked more at the costs that would never go away (property taxes, HOA dues). If you buy a $600,000 condo, your HOA dues are most likely to be higher than a $300,000 condo. Same with your property taxes. I also want to make sure that my lifestyle is sustainable even without a job.

    I’m with Holly – the ideal income is as much as possible and the ideal mortgage amount is zero.

    At the interest rate on my mortgage and the amount of it, I’m not going to be saving much in the way of income taxes – somewhere around $1,000/year. I’d rather just pay off the mortgage. On the other hand, my monthly carrying cost is less than what I would be paying to rent a comparable place and I plan to stay here for at least 5 years, so I think that buying was a good move.

    • says

      Yes, seriously. This article is more applicable to higher income earners. If you are in the 25% or under tax bracket, it’s not a slam dunk to own.

      But, let’s say you make $300,000, a $1 million mortgage interest costs $27,000 a year now with today’s rates. Are you saying spending 9% of one’s gross income is a lot? Hardly. This is the ideal combo.

  9. says

    We’ll likely be only to claim this for another year or two before the standard deduction becomes a better benefit. We might have one instance where we can stagger our property tax payments to have them fall in a year, but even that’s probably a one time thing. The upside is that the low interest rates mean we get to put that to principle instead.

  10. says

    The thrust of your argument is focused on taxes, but how about the 55% that is left? Would I rather earn $1 million and have my interest deduction reduced or earn tremendously less and receive 100% of on my deduction? For me, I choose $1 million! If I am earning that much, I will find a solution or pay a high priced CPA/tax attorney to find a solution. Chances are that I would pay cash for that expensive house that the $1 million a year would probably allow me to do. My fantasy is to either have Romney income or be in the highest tax bracket. I think it would be fun to find a way to beat the man. I did it in the days when I owned income property, although it different now.

  11. says

    I LOVE the mortage interest deduction, hate the phaseouts. Thanks for the analysis on this. For me, I would rather pay my house off and put my money elsewhere, but if taxes are killing you and you can’t afford to buy a house with cash, using your mortgage as tax leverage is a good idea. We’ve saved a TON in taxes over the last two years, and even got the $8,000 tax credit when we bought. So our home has netted us some money, but we have paid more in interest than we have gained in tax benefit.

    Are you getting a better return on your investments than interest you are paying on your mortgage, Sam? If you have enough cash to pay off your house, but your rates are low, then investing that money will get you ahead, no doubt.

    • says

      Investing isn’t a sure thing, which is why I’ve got 30-35% of my net worth in stocks, 30-35% in CDs, and 30-35% in real estate. I’m too dumb to always outperform the market, but outperforming the 1.5% 10-year yield is not hard anymore!

      • says

        Sam, you have some nice diversification, but I gotta tell you, that instead of holding those CD’s you can put that money into a good corporate or municipal bond fund, or even a basket of great dividend stocks that raise their dividends…really Sam over the long-term quality stocks easily can appreciate better than 5% per year (even when you include 08/09)…just my opinion my friend..

        Joe

        • says

          I have 30-35% of my net worth in stocks. I’m happy with that. As my 4% CDs roll off, which I’m very happy with as well, I will invest in other instruments.

          From my experience, everybody thinks they are Warren Buffet at some point in their lives, only to realize at another point, they are not. How has your personal 10 year stock compounded return been?

  12. says

    To add on to your argument about the income level…since $250K now equals millionaire there will also be the healthcare tax on investment income lol

  13. ER says

    I’ve been a silent reader for many months and I greatly appreciate your post. I will soon be coming into a very decent amount of money per year, approximately 300-450,000 before taxes. I would like to retire (or not having to work if I choose not to) in 10 years. I’ve thought about buying up alot of rental properties per year. Do you suggest buying them in cash or putting 20% down and mortgage instead. If I did that, would the benefit in tax interest deduction be worth it? The properties I am looking at are in Texas near Universities and are generally about 90k-130k for each condo. No where near SF prices. I apologize ahead of time for these loaded questions. Again, thanks Sam for your helpful posts… you are quite a motivator!

    • says

      Sounds like you are going to be a doctor?

      If you are in TX making that kind of money, then just pay cash for your 130K condo, especially if that’s where you plan to live. No state taxes.

    • Jon says

      You cannot deduct mortgage interest on rental properties for income taxes. They are treated as an expense and directly offset your rental income. This is much better than just an interest deduction as you’re getting 100% back for every dollar you spend on interest as opposed to 35% depending on your tax bracket.

      The question of buying in cash or using a mortgage depends on the rate of return you wish to achieve. The more houses you buy in cash, typically the lesser your rate of return. The advantages are you don’t have to deal with financing which has gotten to be an extremely time consuming process over the recent years and also less homes to deal with. For me, I am in a capital accumulation phase of my life so I have all my properties financed trying to maximize my rate of return. Each home brings its own headaches….finding tenants, insurance, protesting property taxes every year for each house, etc but you’ll have many more sources of rental income. BTW which part of Texas are you in as I am also in TX.

      • says

        I agree about the direct expense deduction to rental income. A beautiful thing.

        If I am making $350k a year, I am NOT bothering with getting a mortgage for $80K-$110K. I’m paying cash and leading a simple life if I enjoy living in Texas.

        Unfortunately, I like the ocean and mountains and temperature climate here in SF, hence have to pay up.

        Owning multiple rental properties is not worth it unless you are completely hands off and own a lot imo.

        • Jon says

          I agree for the most part, but it totally depends on your stage of life, your current net worth, current income, and goals, and probably 25 other factors hah.

          I agree if you already have a million or two and are making 350k a year, probably don’t want to bother. However, a person in early 20’s with only 100k cash with a goal of reaching FI early may want to buy 5 homes with 100k instead of just 1. In my experience, you can have a good property management company take care of everything and you will still have solid cash flow and a significantly higher rate of return than using all cash. This strategy maximizes your return and minimizes the stress of rental homes. The key is finding distressed homes at discount prices, and managing to obtain clever financing arrangements.

  14. says

    Good post, but looking at it from the other end. For people like me who are making under 100k, when you are calculating your mortgage interest deduction, you have to subtract the standard deduction. I only pay about 12,000 in interest/ prop. tax every year. So I can’t really deduct that amount when I’m doing calculations(obviously I can on my taxes). I really am only getting 12000-5700(std deduction) = $6,300 in deductions.

    I have a post coming out soon on this :)

    • says

      You sure about this regarding the need to subtract your standard deduction from your overall deduction? I always thought it’s choosing whichever provides more deduction? I haven’t made under 100K in a while, so perhaps this is strictly an income issue yeah? Love to read more.

      • Financial Advice for Young Professionals says

        Sorry first comment wasn’t very clear. If I have no house my deduction is $5700(standard). If I buy a house and my mortgage interest/prop tax is 12000 per year. My deduction is 12,000. So by buying a house I am only getting an additional $6300 in deductions. Like I said, makes less of a difference as you make more and mortgage goes up

        • says

          OK, that makes sense and is clear.

          Makes less of a difference UP TO A POINT, which is the point of this article.

          Shoot for $300K household income, and feel comfortable with a $1 mil mortgage provided you have the liquidity as backup and consistent cashflow.

  15. says

    Like any homeowner, I heart the mortgage deduction every year at tax time. I never really understood the logic of giving it to those who buy, and not allowing renters something similar, but in today’s economy with the housing market combusting and recombusting, I am sure that the powers that be will want to do everything in their power to ensure that folks continue to buy.

    That said, I don’t really understand the government logic by allowing a larger interest deduction for folks with higher incomes? Perhaps they feel that those folks are getting taxed more heavily in other areas (with a rate on their fed taxes), so an interest deduction can help offset the burden.

    But if that really is the logic, it seems a little short sighted. While the wealthy are taxed at a higher rate, they have many vehicles (corporations, loopholes) to pay a lower amount of taxes in the long run. Handing them another giant coupon really doesn’t make sense.

    • says

      It’s really about equality e.g. everybody who is a homeowner gets the similar progressive deduction. Sounds logical to me.

      It’s the really wealthy who don’t need the deduction, as you can only deduct $1 million of mortgage indebtedness. The really wealthy that I know have no mortgages and pay cash.

      The sweet spot is the W2 earner making $250,000-$400,000 imo.

  16. says

    As you know from the guest post I wrote for you, I’ve always questioned the dream of homeownership. I’ve always questioned it but I’ve never seen the benefit broken down by income level. Broken down beautifully.

    • says

      Hope you are seeing the light Abe! I’ve been a renter before and a homeowner, and getting the deduction and living in a place of my own truly is a wonderful benefit. Inflation hedge, a potential lucrative investment, and a home!

  17. ER says

    @ER
    I guess I should be giving a little background first. I’m 29. Will be 30 by the time I’m done with residency and start working next fall. I have zero student or car loan and have about 20k in the bank saved up during residency.
    I did not know that interest from income properties can be used as expenses! I want to stay in Texas but want to have the freedom to live somewhere else one day (SF sounds pretty wonderful). The amount of income really depends on the amount of days I want/can to work. I can double what I mentioned earlier if I work 26 out of 30 days… but that probably won’t be very healthy. My background in finances/economics is extremely basic. Up until the last several weeks, I didn’t even know what a CD really was. I’ve been making calculations recently and I think i would generate much more income if for example I buy 10 condo with 20k down (20%), than buying 2 outright at 200k. OF course, there are several other factors and my calculations tried to be as conservative as possible. I am really not sure if retiring in 10 years will be feasible, but will definitely try my best.

    Jon, by the way, I live in Dallas and will most likely work somewhere in one of the big cities. How about you? are you mainly into buying homes or condos? Which one do you recommend? How about you Sam?

  18. says

    Huh, I never thought of as a reason to buy a home, but I guess that tells you which tax bracket I’m currently not in. That’s okay, though. It adds a new dimension to the rent vs. buy conversation that’s been going around and around and around.

  19. says

    Actually 46% of homeowners receive no deduction at all because their itemized deductions do not exceed the standard deduction. Most of the $200 billion subsidy to homeowners goes to those at the top. Compare that to the HUD budget of $50 million and it makes you wonder.

    • says

      Good to hear the majority of homeowners (54%) therefore do get to benefit from beyond the standardize deduction.

      For folks in the borderline 25% tax bracket or lower, homeownership as I mentioned in the very beginning is not as beneficial from a tax perspective.

      $300k income per couple / $1 million mortgage. That is the sweet spot.

  20. Jen says

    Hi! I would be interested to know what your thoughts were on a first time home buyer purchasing an income property vs a live in property. I am currently renting in Los Angeles and I am debating whether to invest in a rental property, live in property, or commercial property.

    I am 29, have about $500K between my investment account, savings account, and 401K. I want to make some smart strategic moves to ensure my retirement and I am receiving a lot of conflicting advise of what my next move should be. I am thinking real estate just because of the cash flow. I am currently in the 28% tax bracket earning $75K/yr with variable performance bonuses from $65K – $85K/yr. I have paid off all my student loans, have awesome credit and virtually no debt (very low car loan). I am leaning towards commercial property but that would not leave me a lot of room for diversification. I would love your thoughts/advise!!

  21. Gary Alvord says

    Great website and great article too. I guess with the new changes for 2013 the numbers will need to be updated. I wonder what the numbers will also be with the new limit on itemized deductions. Thanks again.

  22. dave says

    In AMT is the income phase out the same (max loss of 80%). Say income is 500K, currently have 300K mortgage at 3% (something like 15k per year mortgage interest. What if a second mortgage for 400K was added to picture?
    Are mortgages / mortgage interest on investment properties treated differently?

    Thanks Sam– great site!

    • says

      Tough question. Investment property mortgages are deductions specifically based on the income of your investment property. It’s only the 2nd home mortgage or vacation property where you don’t rent out for more than 14 days I believe which can combine to come under $1 million bucks.

      AMT is tricky. If you make more than $150,000 AGI, you start losing the benefits and get hit left and right with AMT.

      • dave says

        Thanks Sam. How about fix-up / repair expenses on the investment property– can I deduct those against my W2 income or only to zero out my rental income? I have 4 kids, 500k W2 income, and a modest but good rate mortgage. I get killed by AMT b/c I lose all personal exemptions and due to mortgage deduction phase out. I’m simply trying to figure out if real estate may offer a way to help. I have about 300k cash on hand so I could pay off my current mortgage entirely vs use that liquidity to buy a second home. It is currently doing 0.00001% in cash.
        On another of your articles I saw this quote “I fully believe the next 10 years will bring the biggest transfer of wealth ever from savers to levered investors.”

        As a saver this certainly rings true, so I am trying to figure out if I should do a 180 degree course correction–

        Mahalo!

  23. AA says

    Hi Sam

    Love your blog. Been an inspiration for me (along with the $2M blog).

    Havent bought my primary residence yet (my wife and myself are in mid thirties with 2 kids). This year we’ll get kicked into 35% tax bracket. No debt whatsoever. My concern with buying property in NYC suburb area is that I dont think I’ll be staying in my current area, once the kids need to go to school (will need to move to a better school dist. further away). Is it worth buying a house for say 600K, paying 14k in property taxes and then having to move in 5-6 years (and pay real-estate commissions and closing costs). Right now i rent a 5 BDR house for ~3k per month. Given the situation – what would you recommend.
    Thanks,
    AA.

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