Pride of ownership is the number one reason why people yearn to own their home. It means you can paint the walls any color you desire, turn up the volume of your music, attach permanent fixtures and decorate your home according to your own taste. Home ownership gives you and your family a sense of comfort, stability and security. It’s making an investment in your future.
Although real estate moves in cycles – sometimes up, sometimes down – over the years, real estate has consistently appreciated, especially in the prime DC Metro areas. The Office of Federal Housing Enterprise Oversight tracks the movements of single family home values across the country. Its House Price Index breaks down the changes by region and metropolitan area.
Home ownership is a superb tax shelter and our tax rates favor homeowners. As long as your mortgage balance is smaller than the price of your home, mortgage interest is fully deductible on your tax return. Interest is the largest component of your mortgage payment.
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.
As long as you have lived in your home for two of the past five years, you can exclude up to $250,000 for an individual or $500,000 for a married couple of profit from capital gains. You do not have to buy a replacement home or move up. There is no age restriction, and the “over-55” rule does not apply. You can exclude the above thresholds from taxes every 24 months, which means you could sell every two years and pocket your profit – subject to limitation – free from taxation.
If you receive more profit than the allowable exclusion upon sale of your home, that profit will be considered a capital asset as long as you owned your home for more than one year. Capital assets currently receive preferential tax treatment.
Each month, part of your monthly payment is applied to the principal balance of your loan, which reduces your obligation. The way amortization works, the principal portion of your payment is lowest on your first payment and highest on your last payment. This is like a firm, regular commitment to your savings account, or a guarantee that you’ll exercise every day at the same time without fail.
Consumers who carry credit card balances cannot deduct the interest paid, which can cost as much as 18% to 22%. Equity loan interest is typically much lower and is deductible. For many home owners, it makes sense to pay off credit card debt with a home equity loan. Consumers can borrow against a home’s equity for a variety of reasons such as home improvement, college costs, medical needs, or starting a new business. Some state laws restrict home equity loans.