Homeownership, You Certainly Get What You Pay For
Scott Lawson – 10/2/2024
There’s quite a bit of advice floating around the media that is very negative about owning your own home. Typically, articles that are written by a 28-year-old millennial working for a large news publication who has never owned a home in his or her life. The argument is always how much more expensive owning is versus renting—so let’s dig into that a bit. Owning a home has benefits you simply do not see in the first few months of writing out those checks to your mortgage servicer but reveal themselves over time and they are quite powerful.
They are:
- Wealth appreciation
- Tax benefits each year
- A huge tax break upon the sale of the property
Let’s look at wealth appreciation. I have a client in Sonoma County that purchased a property less than a year ago in November of 2023 for $587,629. Interest rates have dropped since then, and he decided it is a good time to refinance. We needed an appraisal, which we just received, and it came in at $650,000. His original investment was $17,629 (this was the down payment-the seller paid for the closing costs) for a whopping $80,000 gain or a 453.79% return in less than a year!!! Leveraged real estate can be one of the best wealth builders for the public that is in existence. Try that with Bitcoin!
Next, the interest expense you pay for the mortgage on your primary residence is tax deductible up to a $750,000 loan amount (please contact your tax advisor for proper guidance). You have two components to your mortgage payment—principal and interest. The interest is indeed tax deductible, and the principal portion pays down the mortgage. It’s you paying yourself—not unlike a forced saving account—pretty cool when you think about it.
Last, the Federal government allows for a nifty tax benefit when you sell your property. If married and you lived in the property for two of the prior five years (prior to the sale), you may exclude $500,000 from the capital gain—if you purchased for $500,000 and sell for $1,000,000, the half a million is tax exempt ($250,000 if the seller is un-married) – again consult a licensed tax advisor for further information. People often confuse this for a 1031 exchange where the proceeds must be rolled into another property in order for the gain to be tax deferred—this only applies to investment properties (rentals). Carful not to mix them up.
There you go—a tax benefit while you live in the property. A fabulous way to build wealth over time as you’re paying your housing expense, and a huge potential tax benefit should you decide to sell some day. Homeownership comes with awesome financial benefits that most people are not aware of in the early going and the media isn’t doing the public any favors by omitting all of the above. It’s not just comparing monthly expenses renting vs. owning.
Owning a home is, and should be, premium priced vs renting (more expensive)
Those that put off owning for it to become evenly priced with renting are on a fool’s errand…Good luck…