The mortgage crisis of 2008 is more than a decade old, but its impact still has many renters shook. Despite all that, the coast is finally clear to find a home that can also turn into a great investment, and we can show you why.
Besides the obvious reasons to buy a home instead of rent (like that it’ll put a smile on your face when you get your first set of keys at closing) there are many other financial reasons to finally put down roots.
If you’ve decided it’s time to stop renting and consider buying your first home., check out this list of the top five reasons to become a homeowner this year.
You Pay Too Much In Taxes
A common excuse to not buying a home is not being married or having kids. Many renters are quick to claim their solo status makes buying a home unnecessary, but it’s actually the best reason to buy. With no dependents, you’re likely paying a higher portion of your income in taxes.
Cut your tax bill down to its bare minimum by becoming a homeowner. Many improvements and expenses related to your house can be written off at the end of the year. Here are a few common tax incentives when buying a house (keep in mind, we are not tax professionals – please consult a professional when preparing your taxes).
Mortgage Interest
Interest on a mortgage adds up. When you begin repaying mortgage debt, a large portion of the payment doesn’t initially go toward the principal balance. Instead, you pay primarily interest in the beginning.
This is great news when considering mortgage interest is tax deductible. There are, of course, limits on the amount of debt and interest you can deduct. Interest is only deductible on the first $1 million of your mortgage loan if you bought a home before 2017.
For most of us regular people, a million dollar mortgage won’t be an issue in this lifetime. After 2017, interest is deductible up to $750,000. Each year expect to receive a 1098 form from your mortgage provider detailing the total amount of interest you paid for the year.
Home Equity Line of Credit Interest
People take out home equity lines of credit (HELOC) for many reasons. When you take out a HELOC, the interest on that loan is also tax deductible.
The limit is the same for mortgages issued after 2018. The rule for deducting interest paid on a HELOC is, in a nutshell: any money borrowed must be used for the home itself. Medical emergencies, going back to school and other large out of pocket expenses aren’t covered under this deduction.
State and Local Property Taxes
Deducting property taxes is a major benefit to homeownership. The total state and local property tax deduction are limited to $10,000 for the year. For states with lower housing costs, this is a great incentive.
Unfortunately for states like California, New York, and New Jersey, the capped property tax deduction means having a larger expense since the cost of living in these areas is high.
Rental Income
Let’s say you’re suddenly offered the job of your dreams and must move cross country. Your residence is now eligible as a rental property. The cost of managing that rental becomes a new tax deduction for you.
Repairs made to make the home livable or to market the property to renters is also deductible. With rental income, your tax benefits become similar to that of a business owner.
Skipping Capital Gains
When you make money from the sale of a capital asset, you owe the IRS capital gains taxes. A capital asset is basically anything you own from a flat-screen TV to stocks. The amount you pay in taxes can be up to 20 percent.
Homeowners are not typically responsible for capital gains taxes when they sell their home. This is a great benefit because gains can be hundreds of thousands of dollars when you sell. The main thing to keep in mind is that you have to live in the home for a minimum of two out of the last 5 years as a primary residence.
Investment properties are not covered by this rule; the exception being if the homeowner occupied the investment home at least 2 of the last 5 years. The major benefit of avoiding capital gains taxes is that you can take the profit from your home and use it toward to purchase of a new property.
Starting a family means adding more people which can mean the need for more space. To offset the expense of a larger home, your untaxed profits serve as an easy way to come up with a down payment.
You Can Be Your Own Boss
Not everyone has the stomach for the ups and downs of business ownership. But owning a home gives you the flexibility to fund a new business if needed. Through a home equity line of credit, you can finance a startup.
As mentioned earlier, a HELOC is a loan secured by the value of your home. You can borrow an amount determined by the amount of equity in your home up to a certain percentage. The more equity you have in your home, the more money you can borrow with a line of credit.
Large startup costs are a key reason many entrepreneurs don’t make it past the first year. With a HELOC you could buy new inventory, equipment or hire experts to help get your idea off the ground.
With a business, your home office often becomes tax deductible. Look into writing off water, electric, internet, and other expenses based on the size of your home office.
The office has to be a place set aside specifically for conducting business. So think twice if a living room came to mind because you use your laptop while watching Netflix. Home offices that are used as guest bedrooms are also excluded.
It’s Your World
It’s literally your world inside your home. Outside of code violations from the city, improvements you make to the property are your prerogative. Ignore what you’ve learned about lease restrictions and go wild in decorating your new space.
Repurpose rooms, knock down walls (within reason) or add a closet to a space to turn it into a bedroom. Tear out the cabinets in the kitchen to make way for trendy open shelving. The choice is yours and no matter how many times you change your mind, no one can restrict your creative choices.
Appreciate Your Home
One commonly overlooked benefit to buying instead of renting is that your hard work pays off. You can appreciate the value of your home through improvements.
No matter how much you spend making a rental property look pretty, it doesn’t belong to you. When you begin making energy efficient upgrades and repaving the driveway at your home, its value almost certainly goes up.
Focus on landscaping, central heating and air, appliances, and insulation to get the most bang for your buck. Remodeling the kitchen and bathrooms are said to be the best investment when making improvements to your home. These are costly renovations, however, so they may not be the first changes you make to your new home.
Take your time to learn the best improvements for your current budget so you can begin making the ultimate investment in your financial future.
One Reason to Buy a Home Instead of Rent a Home is…
You have the money. Buying a home isn’t like buying a car. Your realtor isn’t looking to pressure you to leave a showing with keys in hand.
Because of the sheer size of a mortgage loan, borrowers must be ready to go through a thorough vetting process. Buying instead of renting may not make sense for everyone.
Your credit score is a good sign of whether or not you are ready to buy a home. A credit score shows whether you have the financial habits to repay a large debt even if it is spread out over 30 years. Your savings account is another indicator.
Gone are the days when you could buy a home with no money in the bank and little verifiable income. The subprime lending crisis showed us that borrowers need to bring more to the table than their good looks.
There are still zero down loan programs out there, but most programs require some form of down payment, from as little as 3 percent on up to 20 percent of the purchase price. If you have reasonable credit and a steady job with an income that allows you to save for the expense of buying a house, you may be a great candidate for homeownership.
The Bottom Line
Renting gives you flexibility in where you live. Buying gives you flexibility in how you live. Who could narrow down one reason to buy instead of rent?
The benefits of buying a home instead of rent are varied. Some are tangible and some are just the pride in knowing you have a place in the world to call your own. Whatever the case may be, contact us and we’ll show you how easy it is to commit with a trusted realtor in Portland.
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