Homeownership is an option for many people who are ready to settle down and who are willing and able to meet the financial obligations of a mortgage. While it involves a commitment in terms of finances, time and effort, homeownership has a variety of attractive advantages.
Real estate prices are cyclical in nature, but tend to appreciate over time. Although homebuyers can no longer expect to quickly buy and sell a home to turn a profit, those who intend to stay in the property for an extended period may benefit from appreciation.
Note: While structures like homes depreciate over time, the land underneath the home is what appreciates in value - another example of why "location, location, location" is so important in the real estate industry. Consider this: a run-down home at a popular beach area was on the market for $1.2 million. The home, which sits on less than a quarter acre, was literally falling apart and a new buyer would likely raze the structure and build a new house. Why did this dilapidated home sell for $1.2 million? Location, location, location. This particular property may have sold for even more if the sellers had razed the home and instead sold a vacant lot. Location, and even the specific location within a neighborhood (such as a cul-de-sac), can have a significant effect on appreciation.
Capital Gains Exclusion
Homeowners may be able to exclude up to $250,000 (for individual filers) or $500,000 (for married couples) of profit from capital gains when selling a home. The maximum exclusion may be claimed if the homeowner:
- Owned the home for at least two years
- Lived in the home as a primary residence for at least two years (at least 730 days during the five-year period ending on the date of the sale)
- Did not exclude the gain from the sale of another home during the two-year period ending on the date of the sale
- A change in place of employment
- Unforeseen circumstances
Equity is the financial interest or value an owner has in real estate, over and above the debts against it. Homeowners are able to build equity in their homes as they pay off their mortgages. Part of each monthly mortgage payment is applied to the principal balance of the loan, thereby reducing the obligation and increasing the equity. Equity takes time to build, and if the home is sold during the first few years of the mortgage, the owner may have built little or no equity in the property. If the homeowner plans on staying beyond those first several years, he or she will start to build equity.
Mortgage Interest Deductions
Mortgage interest is deductible on the federal income-tax return if the homeowner:
- Files From 1040 and itemizes deductions on Schedule A
- Is legally liable for the loan (a person cannot deduct interest paid towards someone else's loan)
- Has made the payment on a qualified home
Interest on a mortgages used to buy, build or improve a home after October 13, 1987 may be fully deducted only if the total debt from all mortgages, including any grandfathered debt, is $500,000 or less for single or married filing separately filers, or $1 million or less for married couples. Additional information can be found in IRS Publication 936, "Home Mortgage Interest Deduction."
Homebuyers can deduct moving expenses if they meet the following requirements as set forth by the IRS:
- The move is closely related to the start of work
- A new job location is at least 50 miles farther from the former home than the old job location
- An employee must work full time for at least 39 weeks during the first 12 months after arriving in the general area of the new job
- A self-employed person must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after arriving in the general area of the new job
- Moving household goods and personal effects (including in-transit or foreign-move storage expenses)
- Traveling to the new home (including lodging but not meals)
- Costs of connecting or disconnecting certain utilities
- Costs for shipping a car and household pets to the new home
Pleasure of Ownership
The pleasure and satisfaction of homeownership is a driving force for many homebuyers who wish to "plant roots," have control over their living spaces, and who want to be part of a community. Homeowners are able to plant gardens, paint interior walls any color, knock down walls and otherwise make the home their own based on their own styles, tastes and preferences. In addition, people may enjoy owning homes for sentimental reasons, and consider a home a place to raise a family and create lasting memories.
Property Tax Deductions
Real estate property taxes may be fully deductible for income tax purposes. Most state and local governments charge an annual tax based on the value of real property. Homeowners can deduct the tax if it is based on the assessed value of the property and the taxing authority charges the same rate on all properties in its jurisdiction. According the IRS, "The tax must be for the welfare of the general public and not be a payment for a special privilege granted or service rendered to you." Additional information can be found in IRS Publication 530, "Tax Information for Homeowners." Homebuyers' Walkthrough: Buying New Versus Previously-Owned
InvestingWe've all heard that a home is a great investment, but is it really? In this article, we will look at four reasons why renting could be wiser than homeownership.
Managing WealthLearn more about the financial risks and worst case scenarios associated with buying a home before selling your current residence.
InvestingThinking of buying a home? We look at the initial and ongoing costs, as well as the so-called benefits.
InvestingMortgage payments aren't the only expense. Find what else you'll be on the hook for.
InvestingSaving enough to buy a vacation home involves some unique considerations including a big down payment and more lending hurdles.
Personal FinanceHere are the key situations when you should probably pass on this type of home loan.
InvestingAre you ready to buy a home? Find out if it's the right time for you to enter the real estate market.
InvestingMany dream of home ownership, but the timing should be right. There are a host of reasons why you may want to put off homeownership for awhile.
RetirementIf you have substantial home equity and don't want to do a reverse mortgage to tap it for retirement expenses, cost out these viable alternatives.
Managing WealthDiscover the financial factors behind owning a second home and how weighing your options can determine if a vacation home is right for you.