The first reason to buy a home of your own is pride of ownership, which is a psychological benefit to owning rather than renting. The pride of ownership is reflected in a well-maintained property. However, a price cannot be attached to this subjective value, and its importance will vary from person to person. Most folks seek the freedom to do whatever they want in the place they live; from attaching permanent fixtures to decorating and painting wherever they wish. But more importantly, home ownership gives you and your family a sense of stability and security.
Although the real estate market is cyclical, with periods of boom and bust, investing in real estate has historically been one of the best ways to increase your wealth. Home appreciation is the number one reason for buying a place of your own. The chart below shows how a $100,000 investment in Northern Virginia real estate in 1975, could have become $953,000 by 2006 and $713,000 today. Data is obtained from the Federal Housing Finance Agency (FHFA), Housing Price Index for the Washington DC metropolitan area.
Everyone knows that owning a home is the American dream, but did you know that borrowing to pay for one is a taxpayer’s dream? The interest on your home mortgage, your home equity line of credit, and any construction loan you may have, are all tax deductible expenses. However, the amount you can deduct is limited. Furthermore, you can only deduct interest paid on your main home and a second home. At the end of each year, your lender should send you a “Form 1098”. This form tells you how much you paid in interest and points during the year; this is your deductible interest. Taxpayers need to file the “Form 1040” to itemize these deductions.
Although at the beginning borrowers pay mostly interest on their loan, the amount paid towards principal increases every year. Through this process of amortization, borrowers build equity as they pay down their mortgage. Therefore building equity is another good reason to buying your own home.
IRS Publication 530 contains tax information for first-time home buyers. Real estate property taxes paid for a first home and a vacation home are fully deductible for income tax purposes. Most homeowners pay property taxes to a state, local or foreign government. In order to deduct these property taxes, they must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose property taxes for local improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. Local property taxes are deductible only if they are for maintenance or repair, or interest charges related to those benefits.
After you sell your home, as long as you have lived there for two of the past five years, you can benefit from Capital Gain Exclusion of up to $250,000 for an individual or $500,000 for a married couple. You do not have to buy a replacement home or move up. There is no age restriction, but you can only exclude the above thresholds from taxes every 24 months. Furthermore, if you received more profit than the allowable exclusion upon the sale of your home, that profit will be considered a capital asset, which would receive preferential tax treatment as well.
Finally, remember that the outrageous interest you are paying to your credit card company is not tax deductible. However, when you purchase a home that appreciates in value, you qualify for a home equity loan. By using this loan, you can completely eliminate your credit card debts, get a much lower interest rate, and deduct the interest you are paying from your taxes at the end of the year.
Cameron Akhavan MBA, is a Realtor and Licensed Mortgage Consultant living in Ashburn, Virginia. “Please contact me if I can be of assistance to you or your friends with your real estate needs.” Contact Cameron or visit His Website. See also: Ashburn Lifestyle, Cameron’s Ashburn community guide.
