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. Last Updated: 07/27/2016

Tax Breaks Take Sting Out of Mortgage Loans

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When the time comes to buy a new place, most Russians and some expatriates think it's actually better to save for years and pay cash for their homes rather than pay interest on a mortgage loan. What they may be missing is not only a great tax benefit but also a unique market opportunity to buy now while prices are on the rise.

The growth of any middle class is tied to the establishment of property wealth. While the U.S. housing market has had its ups and downs over the past 50 years, the middle class was able to prosper and grow through the accumulation of property wealth. By buying with the help of mortgage loans, Americans were able to take advantage of increasing property values as the U.S. economy grew.

Russians are not that much different. In fact, few Russians understand that they actually have an even greater advantage than most other people.

When privatization of housing was made possible during the early 1990s, Russians were able to privatize their existing apartments for a nominal fee. For those who privatized, they became owners of property with real value and no existing liens. In the context of net worth, most Russians would be surprised to learn that their net worth (the value of their assets minus any debts) is actually substantially higher than most people elsewhere in the world. With the help of a mortgage loan, Russians can tap into this existing property wealth and trade up to better housing.

Since the 1998 crisis, housing prices have steadily increased and this year began to increase rapidly. For many people, they would rather save for a few more years for the $50,000 apartment they have their eye on. However, if housing prices continue on current trends, that $50,000 apartment will cost $75,000 in two years, putting a new place out of reach for most people saving. But if you were to buy that place now, the owner could take advantage of one of the best investments in Russia today. While most Russians do not think of their place as an investment, it actually has a better return than money in the bank or the stock market, its safe and you can live in it or rent it out.

It often surprises me that Russians and some expatriates are astonished at today's interest rates for mortgage loans. However, most would be surprised that Russian interest rates are comparable to those in the United States during the early '80s recession.

Russia provides some of the world's best tax incentives for people using a mortgage to purchase a new place. With these advantages, the effective rate for a mortgage is actually less than 3 percent. Until last year, people taking a mortgage loan could deduct not only the interest they paid on their mortgage but also the principal. Although this advantage was modified as of Jan. 1, there are still tremendous benefits available. People taking out a mortgage loan can still deduct not only the interest paid, but also up to 600,000 rubles ($20,900) paid for housing. These payments can be deducted from taxable Russian income.

If you paid cash, not only would you not be able to take a deduction, but you would have to explain to the tax authorities the source of your cash. The tax authorities have the right to question the source of any purchase over $10,000.

James Cook is president of DeltaCredit, the mortgage program of The U.S. Russia Investment Fund. TUSRIF is a U.S. venture capital fund charged with promoting investment in the Russian economy.