Buying a Home vs. Renting

March 13, 2020

Reasons to Buy a Home vs Renting

You Can Do Anything You Want With the Property
Pride of ownership is the number one reason why people yearn to own their home. Owning your home means you can paint the walls any color you desire, turn your music up, attach permanent fixtures, and decorate your home according to your own taste without asking a landlord for permission. Home ownership gives you and your family a sense of stability and security. It's making an investment in your future. And sometimes, making these home improvements will increase the value of your property.

Appreciation Benefits, Including Leverage of Cash Invested

Owning a home is an investment many people can understand better than buying stocks, because they get the tangible daily lifestyle benefit of living in the home. But the financial benefits are also significant, and can be more substantial than stock investing. As a home appreciates, it accrues faster than a stock might because you get the appreciation on the entire home’s value, not just the gain your down payment cash invested.
First, real estate moves in cycles, sometimes up, sometimes down, yet over the years, real estate has consistently appreciated. 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. Many people view their home investment as a hedge against inflation.

Tax Benefits

Homeowners are allowed to deduct mortgage interest and property taxes when they file tax returns each year. This significant savings from tax benefits can often make owning the same as, or cheaper than, renting. 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 receive preferential tax treatment. This means even if your profit exceeds the exclusion, the taxable portion will be much less than you might imagine.

Mortgage Costs Stay the Same as Rents Rise

If you get a fixed-rate mortgage on a home purchase, your mortgage payment can never change. Unless a renter is in a rent-controlled building or neighborhood, their rent is at risk of rising every year. Since the mortgage payment is the bulk of the owner’s housing payment, this creates a lot of budget stability. As for the other costs, both owners and renters have insurance (though insurance isn’t required for renters like it is for owners), and that fee can change very slightly year over year. And while owners have property taxes that renters don’t, and property taxes can rise as the home appreciates, this fee is tax deductible.

Home ownership is also a superb tax shelter and our tax rates favor homeowners. Sometimes the mortgage interest deduction can overshadow the desire for pride of ownership as well. 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.

Forced Savings

When a homeowner is making a mortgage payment, a portion of that payment is paying the loan down each month, giving the owner more equity in their home. Using the example of a $300,000 home purchase with 10 percent down, the average pay-down per month in the first year is $423, and the average in the second year is $438, and the average pay-down per month keeps rising each year. This loan pay-down each month is required as part of the mortgage payment, but it’s the owner being required to invest in their own home, so it’s like forced savings that benefits the owner — whereas the entire portion of a renter’s monthly payment is going to a landlord.

Property Tax Deductions & Capital Gain Exclusion

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.

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