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

is it better to buy or rent?
Buy or rent? The myth that you're "throwing money away" on rent isn't always true. © Flickr user Images of Money

Question: Should I Buy a Bigger Home for the Tax Deduction?

I know that the interest people pay on their mortgage is tax-deductible. I'm afraid that I'm going to be in a higher tax bracket. Should I buy a bigger or more expensive home so that I can take a bigger tax deduction?

The Answer: It's Not as Clear-Cut as That

First of all, let me give the disclaimer that every individual's unique tax situation is different.

Please contact your CPA or licensed tax professional for advice.

Okay, with that disclaimer out of the way, let me give you my two cents:

Creating an expense for the sake of the tax deduction means you're spending one dollar in order to save 35 cents. It doesn't make sense.

The interest that you pay on your mortgage is ... interest. It doesn't help you build equity. The less mortgage interest that you pay, the better.

Even Using Cash, it's Not Worth it

Most people don't have enough cash to buy a home outright, using cash. And even if they did have enough cash, they might be better off diversifying their money by investing some of it in index funds or other equities, rather than using all of their money to buy a home. It's smart to diversify your holdings.

Given that fact, most people take on mortgage debt when they buy a home. And in order to encourage homeownership, our government subsidizes the interest paid on mortgages.

The More Interest, the Better?

However, that doesn't mean you should try to pay as much interest as possible. At the end of the day, hard-earned cash is still being spent out of your pocket -- and it's not going towards your home equity.

To phrase it a little differently: would you call your bank and ask for a mortgage with a higher interest rate, just so you could take the bigger deduction?

No, of course not. In that same vein, don't choose a more expensive house purely for the sake of the tax deduction. It's not worth it.

One Other Thing to Consider

Buying a bigger (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 house is likely going to cost more to heat and cool each summer and winter. 

It's also going to take more time to clean and keep up with, which means you'll be using more of your time (which is valuable), or you might want to hire a cleaning person for it. 

You might also be tempted to buy more furniture to fill all the room you gain by up-sizing. 

When you think about it in those terms, it's simply not wise to justify purchasing a larger home for the tax deduction alone. 

The information on this site is for discussion purposes only, and should not be construed as professional advice.