Should I Buy a Bigger Home for the Tax Deduction?
Taking on More Expenses Might Not Be the Best Idea, Even for a Tax Deduction
Homeowners often wonder if they should buy a bigger home to take advantage of the tax deduction. That's because homeowners know that the interest they pay on their mortgage is tax-deductible. On the other hand, they're afraid that they're going to be in a higher tax bracket. So, the question becomes, "Should I buy a bigger or more expensive home so that I can take a bigger tax deduction?"
Unfortunately, tax and real estate issues are complicated and there is no clear-cut answer. Every individual's tax situation is different and unique. If you're asking this question then the first thing you need to do is to contact your CPA or licensed tax professional for advice.
With that said, in most situations, creating an expense for the sake of the tax deduction means you're spending a dollar in order to save 35 cents. The interest that you pay on your mortgage is just that, it's "interest." It doesn't help you build equity. Also, the less mortgage interest you pay, the better.
Even Using Cash, It's Not Worth It
Most people don't have enough disposable cash to buy a home outright. Even if you did have the available cash, you might be better off diversifying their money by investing some of it in index funds or other equities. In other words, rather than using all of your money to buy a home it's much smarter to diversify your holdings. Additionally, in order to encourage homeownership, the U.S. government subsidizes the interest paid on mortgages.
Does Having More Interest Make Sense?
Just because there is an upside to incurring interest, this doesn't mean you should be looking for ways to pay as much interest as possible. In the end, your hard-earned cash is still being taken out of your pocket and it's not being applied towards your home equity.
Logically, you would not call your bank and ask for a mortgage with a higher interest rate just so you could claim a bigger deduction. In that same vein, it doesn't make sense for you to knowingly purchase a more expensive house purely for the sake of taking a deeper tax deduction.
Other Expenses to Consider
Buying a bigger (and more expensive) home just to save on taxes isn't the best idea when you consider all the other expenses that come with owning a larger home. For example, that larger home is likely going to cost more to heat in the winter and cool in the summer.
It's also going to take more time to clean and maintain. In addition to taking more of your time and energy, you'll likely need to spend more money hiring a cleaning person, a landscaper, a gardener, and so on. There's also the additional furniture you'll purchase to fill all the extra space you've taken on.
When you think about it in all of these terms, nine out of ten times, it's simply not wise to justify purchasing a larger home for the tax deduction alone.