Military Members in a HIGHER BAH area have added benefits. So you read this article about owning a home and how BAH affects your taxes if you itemize.
For military members BAH is tax-free and depends on your area. In high-cost areas you receive more BAH, in low-cost areas you receive less. Makes sense, right? If you live in a high-cost area and use your tax-free BAH towards a mortgage instead of rent (with all variables staying the same, maintenance etc.) then buying will have an added bonus!
Notes: How BAH Affects Your Taxes
The following assumptions are made:
- Entire BAH allowance is used for the mortgage
- VA loan is use (no down payment or pmi)
- Property tax is 1.3% of the Sales Price
- Insurance 0.3%
- Overall Tax Rate 25%
For example:
An O3 with dependents (married) makes $3,234 BAH in San Diego in 2015 (found here).
You could buy approximately a 525k home and your payment would be $3,161 a month.
Mortgage Interest- $20,212.56 (for the year)
Property Tax – $8,401 (for the year)
Total- $28,612.56
This is saying that if you have no more expenses than a rental then you are able to write off $28,612.56 off your taxes plus any other deductions the IRS allows.
Let’s assume you are at 25% tax rate. So this “savings” is worth $7,153.14 in tax savings!
That is for doing nothing more than BUYING rather than RENTING!!
Another Note
This is a tax “deduction” so it come off how much you earn and your “category”. So if it brings you below a large tax threshold or allows you to be able to partake in credits that you otherwise wouldn’t be eligible for it would have a lot more affect than the above illustrates.
In the same sense if you only have a 10-12% tax rate than the tax savings is much less.
These numbers are just food for thought. There are PLENTY of other variables involved.
The point is buying a house – ESPECIALLY in a HIGH cost of living area could have a HUGE effect on your taxes!
*Apologies from the Author- There was a mistake made in the city. Oakland was used not San Diego.
What is your experience?
2
Your example uses the bah for an admiral not an o3.
An o3 in San Diego gets about 2600 a month in bah.
Thank you for the heads up! I made a typo!
One caveat not mentioned by the author: you have to be able to sell or find a tenant for the house you purchased when you receive orders out of the area. Also, if property values decrease while you occupy the house, you will be “under water” when it comes time to sell or place a tenant in the property. These are problems not faced by renters.
Your BAH calculation is about $900.00 for an o3 – this is the official site for BAH rates:
http://www.defensetravel.dod.mil/site/bahCalc.cfm
a final edit that is missing – $900.00 off from what actual BAH for an O3 receives –
Thank you! There was a typo! I appreciate the heads up!
I’m not sure where your source you link to is getting BAH rates, but we’re stationed in San Diego and an O3 BAH is only $2610, not $3234. An O4 is only $2919. Do better research on your sources, especially if you’re trying to give financial advice.
Thank you for the heads up! I appreciate it. I made a mistake and didn’t realize I had Oakland and not San Diego.
Great example and a thoughtful article, but I do believe that it’s best to be consistent, especially when even the correct base numbers are not likely to be obtained by most military members.
Most military members make less than SD BAH, and make even less than O3 base pay.
Unless the O3 is a CRNA with lots of time in, a Dr, who’s completed residency, a fully qualified Pilot, an SF guru, or a Nuclear Officer they aren’t going to be facing a 25% marginal tax rate. Its just not possible by the pay charts.
And there is no 12% federal tax bracket.
Using your numbers of:
4% interest
1.3% tax
0.3% insurance
Ignoring loan org fees
Ignoring utilities
Ignoring repairs
Using correct BAH for O3 in SD
Using 15% marginal tax rate
Max mortgage amount of $425,000
$23,663 in first year deductions
That’s $11,063 greater than the standard married deduction, leaving a true tax savings of just $1,659.
It’s something, but again we left off the repairs, utilities.and HOA’s that are so common in much of the newer properties of the SD region.
Thank you for such thoughtful argument! I totally agree that there are a lot of other factors. One that neither one of us touched on was duel income. As one, we pay dearly 😉
I ignored utilities because other than base houses (and that is changing) these aren’t included. That being said, you are totally right that repairs were left out of the equation.
The article was written as food for thought! Although these number are not applicable to many, there are many more who they are applicable. I wrote this article as an FYI, because I have met quiet a few people who experienced this “surprise” at tax time. Previous years it was always “good” because it was after people bought there first house. Unfortunately lately, it has not been a “pleasant surprise” because people went from owning to a rental and didn’t change there taxes ;(
That being said, I truly appreciate you feedback. You made some great points!!
I agree with the idea of uour post. BAH is wonderfull because it counts for income for loans but not taxes
Thank you!