Buy or rent? Sometimes the choice is obvious, depending on the cost of living and of real estate in your area. Other times, it's less straightforward.
One of the things to take into account is taxes. If you own your home then you may be able to take advantage of something called the Home Mortgage Interest Deduction. Whether this is an advantage for you depends on certain factors.
First of all, you can only take the deduction if you have "secured debt" on a "qualified home." Secured debt means that your ownership is security for the debt - which is the case with all standard mortgages, but may not be the case with certain kinds of home equity loan. Wraparound mortgages don't qualify. The qualified home must be your main home or second home. If you rent out your second home year round, it doesn't qualify. If you have more than one second home (and note that boats used as a home count), you can only deduct interest on one.
So, are there reasons to not take the deduction? It might seem that any deduction off of your income is a good thing, but the home mortgage interest deduction has some complexities.
1. You need to itemize deductions. You should calculate both itemized and non-itemized deductions and see which gives you a better deal. For most homeowners it does, but depending on your mortgage payments and property tax, it may be cheaper to take the standard deduction. Generally, it is cheaper to take the standard deduction if your mortgage or home equity loan is for a lower amount.
2. If you run a home business, it is complicated. You need to work out what the part of your home you use for the business is worth and deduct that, then claim that value on your Schedule C or similar. This can all end up costing more in tax advice than you save in deductions (also, claiming a home office deduction can greatly increase the chance of your business being audited). Note, too, that you can only claim a home office deduction if you use part of your home "exclusively" for the business - this normally means having an office with a door that closes, which is used only, or at least mostly for work.
3. The interest is only deductible for the first $1 million of a mortgage or $100,000 of a home equity loan. If your mortgage is a lot over that it can become questionable whether it is worth it.
4. If you file taxes separately from your spouse, then you each get 50% of the deduction. Unless only one of you is on the mortgage, in which case...the one on the mortgage still only gets 50%, and the other gets nothing. (Lesson: If you are married, add your spouse to the mortgage). This does not apply to unmarried couples who have to file separately.
5. If you rent out part of your home, you can still take the full deduction unless you have more than one tenant or you are renting out a studio or in-law suite (with separate kitchen and bathroom). If your tenant runs a business, though, then you lose the value of that part of your home. Again, this can make things extremely complicated.
However, for the vast majority of homeowners, taking the home mortgage interest deduction makes sense. You can also choose not to take it - which sometimes makes sense if you are running a business - but for the most part it is a no-brainer to take it. When deciding whether to buy or rent, you should cost out what the deduction will save you when comparing rents and mortgage payments. It can make the difference.
If you aren't sure whether you should or not, then you should talk to MSM Accounting and Tax Services, especially if you run a business or have three or more homes. A qualified accountant can help you work out whether - and how - to take the deduction.