Income Tax Time: Value of Homeownership

In the midst of tax season, the California Association of REALTORS® (C.A.R.) has decided to take a closer look at the benefits that go along with homeownership, particularly the consumption and tax benefits. There are generally two primary reasons for owning a home: for consumption purposes and for investment purposes. At this time of year, everyone is doing their tax returns or will have to do so before April 15th. It is crucial to reap all of the tax advantages available to you as homeowners. We will take a quick look at how valuable your homeownership is and how it can add to your bottom line during this tax season.

Our first look at the value of homeownership is the return on investment alone.
Let’s take a look back. Just imagine you bought your home at the median price five years ago. That home would have cost you $227,160 (February 2000 single-family median home price). In just five years, the value of your investment has skyrocketed to $471,620 (February 2005 single-family median home price), thus reaping a 107 percent gain in the value of your home. On average that is a 20 percent per year return, which is in and of itself an amazing return on your investment in any circumstances. In fact, that is nearly 3 times the nation’s return 7 percent per year over the same time period.

That return on your investment does not even take into account that the investment also provides a place to live for you and your family. Because this real estate investment is also your primary residence, you have a vested interest to take the proper care i.e. renovations, maintenance, and repairs, all of which are necessary in any real estate investment. Therefore, the benefits reaped are two-fold: the improvements made to the actual structure and property, and also the improved quality of living for you, your neighborhood, and community overall.

From a pure investment standpoint, if you decided to sell your home in 2004, $250,000 of that profit or equity is tax free if you are single and doubles to $500,000 if you are married and file a joint tax return, as long as you have lived in the home for at least 2 years and it is your primary residence (IRS Publication 523). Let’s take a look at the February 2000 example again. If you purchased your home in February 2000 for the then median price of $227,160 and decided to sell five years later in February 2005 for the going median price of $471,620. The equity gain on the sale of your home would be $244,460 and thus that amount earned would be tax-free.

Along with home equity gains and overall appreciation, there are other huge tax advantages to owning your own home—interest & property tax deductions. Let’s fast forward to those who have purchased a home recently. If you buy a home today at the February median of $471,620, and if property taxes are about 1 percent of the property value, the property tax deduction for that home would be approximately $4,716 in your first. In the first 12 months the interest paid on that home loan would total $26,750 (Interest calculated assuming a 20% downpayment with 5.71 percent FHFB February 2005 composite mortgage rate). Therefore, if you are in the 25 percent tax bracket the total tax savings in the first year of owning the home would be around $8,000 ($31,460 interest paid & property taxes x 25 percent marginal tax bracket). The IRS allows you to deduct the entire amount of interest paid on your home loan as long as you complete a Schedule A on your 1040, the loan is in your name, and the mortgage must be secured by collateral (usually the home itself—IRS Publication 936).

Many homeowners are also taking advantage of the ability to consolidate credit card debt and roll it into a home equity loan. The main advantage to this approach is being able to deduct the interest on the home equity loan as the first mortgage deduction rules apply. Interest on credit card debt is non-deductible and the rates charged are typically higher than that of the current rates charged on home equity loans. By taking advantage of these types of perks, homeowners are able to better handle their debt and improve their financial situations.

Homeowners reap many advantages when tax season comes around. Make sure you squeeze the most out of your homeownership as you can.