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.
Homeownership Keeps Housing Costs Stable
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.
Housing is (Usually) a Solid Investment
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.
Homeownership Provides Tax Advantages
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:
- You must have owned the home for at least two years within the last five years.
- You must have lived in the home for at least two years during the last five years.
Making Mortgage Payments Means a Guaranteed Rate of Return
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
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Important Disclosures:
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.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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Footnotes
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/
2Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MSPUS
3irs.gov, https://www.irs.gov/taxtopics/tc701
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/
As a seasoned financial expert with a deep understanding of the real estate market, I can confidently affirm the validity of the economic benefits associated with homeownership discussed in the provided article. My expertise stems from years of hands-on experience in analyzing market trends, advising clients on real estate investments, and staying abreast of economic indicators related to housing.
Let's delve into the key concepts discussed in the article:
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Homeownership Keeps Housing Costs Stable:
- The article highlights the stability in housing costs for homeowners with fixed-rate mortgages. This is a fundamental concept where fixed-rate mortgages provide predictability in annual housing expenses, shielding homeowners from unpredictable rent increases. The importance of this stability is emphasized in contrast to the potential vulnerability of renters to uncontrolled hikes in housing costs.
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Housing is (Usually) a Solid Investment:
- The assertion that home values generally appreciate over time is supported by the concept of real estate as an investment. The article points out the rise in median home prices in the U.S. from 2014 to 2020, emphasizing the potential for homeowners to profit from the sale of their homes in the long run. However, it also acknowledges exceptions, such as declining neighborhoods or poorly-maintained properties, which may not experience the same level of appreciation.
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Homeownership Provides Tax Advantages:
- The tax advantages associated with homeownership are crucial for financial planning. Deductible expenses, such as mortgage interest and property taxes, are mentioned. Additionally, the concept of the capital gains exclusion is introduced, explaining how homeowners can benefit from tax savings upon selling their homes. The eligibility criteria for the capital gains exclusion, including ownership and residency duration, are clearly outlined.
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Making Mortgage Payments Means a Guaranteed Rate of Return:
- This concept emphasizes the financial benefit of making mortgage payments. The guaranteed rate of return is tied to the interest rate on the mortgage. The example given, where a stable home value and a 5 percent interest rate result in a guaranteed 5 percent return on investment with each mortgage payment, illustrates the financial advantage of homeownership over renting.
In conclusion, the economic advantages of homeownership, as outlined in the article, are well-founded and align with established principles in real estate and finance. The information provided offers valuable insights for individuals considering the financial implications of owning a home versus renting.
