Why Invest in a Home?

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Why Invest in a Home?

There are lots of reasons to buy a home: the pride of ownership, the freedom of owning your own lodging, and the comfort of moving out of a cramped apartment, to name but a few. But what makes home ownership a good investment?

Homes typically increase in value

To begin with, homes often increase in value over long time periods, creating perhaps the most common source of capital gains. The demand for housing has never been greater—especially with the rapid population growth of the last half-century—and that demand has fueled consistent growth in real estate prices. Home prices typically appreciate in times when the local and global economies are doing well. However, one should be wary that past growth is no guarantee of future growth.

You can build wealth by making house payments

Generally, your wealth increases as you make mortgage payments. Although the interest belongs to the institution that made the loan, the principal portion of the payment belongs to you, and it may accumulate—like a savings account—over time. Your accumulated principal plus the appreciated value of the property is commonly referred to as your home equity, or the amount you actually own (as opposed to what you owe the bank, credit union, or mortgage company).

You can get tax deductions for the interest and property tax you pay

But even what you owe on a house has its advantages. The biggest advantage is the mortgage interest deduction for taxpayers who can itemize deductions. Generally, you can deduct the interest paid on certain loans secured by your home (or second home). These loans can be the mortgage to purchase the house, or in certain cases a loan or line of credit borrowed against your home equity. You can deduct interest paid on mortgages up to $750,000 if you are married and file taxes jointly, or $375,000 if you’re married and file separately. The interest deduction for home equity loans—which was previously limited to home equity loans up to $100,000 ($50,000 if you are married and file separately)—was limited even further by the recent tax law, beginning in 2018. It now applies only to using the loan proceeds to buy, build, or improve the home that secures the loan, as opposed to paying off other debts, buying a car, taking a vacation, paying for education, etc. Grandfathering rules for use of the old limits and rules apply.

You can also deduct the property taxes you pay, if you itemize deductions, subject to the overall $10,000 limit for state and local taxes. And when your family decides to sell the house, the first $500,000 in capital gains ($250,000 for single taxpayers) is generally tax-free. Special ownership and use rules apply, however.

There are still other tax deductions available

Still more deductions are available, though certain rules apply for some of them:

• Mortgage points
• Refinanced mortgage points
• Private mortgage insurance
• Certain energy-efficiency home improvements
• A home office
• Mortgage interest credit for some lower-income people