Taxes

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How much money could we save in federal taxes if buying a larger house with higher property tax? Will it offset a higher mortage payment at all? We live pretty inexpensively right now for our income. How do we figure this cost into the equation when looking to buy a bigger house?

[Jon Holdman]

You will still come out with less money in your pocket.

Interest is also deductible.

Say you're in the 28% tax bracket. You buy a larger house than you really want in order to get the "tax benefits". You pay an extra $10,000 in interest and real estate taxes over what you would have paid with the house you really need. You get to deduct that $10,000 from your income. That saves you $2,800 in taxes. So, you pay $10,000 and save $2,800. That means you're paying out $7,200 over what you would have paid on the smaller house.

The "tax benefits" from real estate are that you get to pay the interest and property taxes with pre-tax dollars rather than after-tax dollars. You still have to pay and its still money out of your pocket.