June 03, 2022
Even though housing prices throughout much of the U.S. are at or near all-time highs, there are still many distinct financial advantages to owning a home.1 From tax benefits to capital gains exclusions and guaranteed rates of return, we explore four of the biggest economic benefits that can come from homeownership.
If you purchase your home with a fixed-rate mortgage, you’ll be able to predict exactly how much you’ll pay for your home year over year. Although property taxes and homeowners insurance rates tend to increase over time, for most homeowners, principal and interest make up the majority of their total mortgage payment.
Renting, on the other hand, can leave you vulnerable to increases in housing costs. If you live somewhere without rent-control measures, there may be no limit to how high your rent can go. You may even find yourself searching for a new rental property with little notice if your landlord sells the property or declines to renew your lease.
In general, home values increase over time. While this doesn’t guarantee you’ll see a profit immediately—or even after a few years—if you own your home long enough, you’re likely to be able to sell it for more than you paid. From 2014 to 2020, median home prices in the U.S. rose by nearly $50,000—more than 16 percent over just six years.2
There are some exceptions. For example, if you purchase a home in a declining neighborhood or your home falls into disrepair, its value may stagnate or even decrease. But for most homeowners, a house can represent one of the best possible investments you can make.
After purchasing a home, if you itemize your taxes, you’ll be able to deduct some expenses, including mortgage interest and property taxes. If you have a home-equity loan or line of credit, you’ll be able to deduct the interest you pay as long as the funds are used to improve your home.
Not only can you take advantage of tax deductions and credits while you own your home, but you can also save money on taxes when you sell it. The capital gains exclusion allows you to profit up to $250,000 for single tax filers or $500,000 for married tax filers on the sale of a home without paying any taxes on this amount.3 This means that if you’re a married taxpayer who purchases a home for $300,000 and later sells it for $900,000, you’ll owe taxes on only $100,000 rather than the full profit from your sale.
To qualify for the capital gains exclusion, you’ll need to meet two criteria:
Though there are some advantages to renting, paying rent doesn’t provide you with any financial benefit beyond the obvious one—having a place to live. Paying your mortgage, on the other hand, provides you with a guaranteed rate of return based on the interest rate. For example, if your mortgage has a 5 percent interest rate and the value of your home remains stable, each payment you make is like getting a guaranteed 5 percent return on your investment.4
1US House Prices Continue to Soar, statista.com, https://www.statista.com/chart/26901/development-of-single-family-home-prices-in-the-us-by-index-points/
2 Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MSPUS
4Should You Pay Off Debt or Invest for Retirement?, Forbes, https://www.forbes.com/sites/forbesfinancecouncil/2020/06/26/should-you-pay-off-debt-or-invest-for-retirement/
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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This article was prepared by WriterAccess.
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