There's no place like home

By Andrew D. Schwartz, CPA Schwartz & Schwartz, P.C., Woburn, MA

We're all familiar with Dorothy's famous words in the Wizard of Oz, "There's no place like home." When it comes to financial planning, Dorothy's sentiment rings true.

Advantages of Home Ownership

First, owning your home saves you taxes. Unlike rent, which isn't tax deductible, paying a mortgage and real estate taxes is deductible on your federal tax return. Let's say you have a $400,000 mortgage with an interest rate of 6%, and you pay $3,000 in real estate taxes each year. If you're in the 30% tax bracket, you'll save $8,100 in federal taxes this year. That's a tax savings of $675 per month.

Home ownership also provides you with a tax-free way to accumulate wealth. Under the current tax rules, when you sell your principal residence, you won't be taxed on the first $250,000 of appreciation if you're single, or the first $500,000 of appreciation if you're married, as long as certain conditions are met.

What does that mean to you? Unless you sell your home for more than $500,000 ($250,000 if you're not married) above what you paid for the home plus improvements, you won't pay a dime in taxes. It's important to note that the home sale rules changed in 1997 and you no longer need to roll over the proceeds from the sale of your principal residence into a more expensive home within two years to avoid paying taxes on the gain realized.

When you own a home, you also have a nice hedge against inflation. Think back to your days as a renter. How many years can you remember that your landlord didn't increase your rent? When you own a home, if you have a fixed rate mortgage, your monthly payment remains fixed over the life of the loan. As inflation causes the price of everything else to increase (including your salary), it's nice to know that your largest monthly bill will remain constant.

Potential pitfall

There are times when owning a home might not make sense. If you're not sure where you'll be living in two or three years, you might be better off remaining a renter for now. With the transaction costs of buying and selling a home as high as 10% of the cost of the home, unless your home appreciates by 10%, you could end up losing money when you sell it to move to a new city.

Is now a good time to buy your first home or to upgrade to a more expensive home? While interest rates are still pretty low (but apparently on the rise), home prices are generally quite high throughout the U.S. In the short-term, therefore, you might overpay for a home if there is a correction in the housing market. In the long-term, however, owning a home (that doesn't break the family budget) is a key ingredient to most people's financial well being.