Whoa, doggies! Are we really coming on to Income Tax time? We
must be. I haven’t seen my CPA friends for the past month or so.
The California Association of Realtors (CAR.) has taken a close
look at the benefits that go along with homeownership so I thought
I’d share them with you. Perhaps it’ll be a little ray of sunshine
in the gloom of tax season.
Whoa, doggies! Are we really coming on to Income Tax time? We must be. I haven’t seen my CPA friends for the past month or so. The California Association of Realtors (CAR) has taken a close look at the benefits that go along with homeownership so I thought I’d share them with you. Perhaps it’ll be a little ray of sunshine in the gloom of tax season.
There are two primary reasons for owning a home: for consumption purposes and for investment purposes. (By consumption I mean you live there, not that you eat it.) At this time of year, everyone is doing their tax returns or will have to do so before April 15. So naturally you want all the tax advantages available to you as a homeowner. Let’s look at how valuable your homeownership is and how it can add to your bottom line during this tax season.
The first value of homeownership is the return on investment alone. 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 rose 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. I don’t think you found that type of growth in the stock market.
That return on your investment does not even take into account that the investment also provides you with a place to live. Because this real estate investment is also your residence, you probably take the proper care (i.e. renovations, maintenance, and repairs) which is necessary in any real estate investment. Therefore you improve the quality of living for you, your neighborhood, and your community.
From purely an investment standpoint, if you decided to sell your home, $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. If you purchased your home in February 2000 for the then median price of $227,160 and decided to sell five years later 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. Yippee!
Along with home equity gains and overall appreciation, there are other huge tax advantages to owning your own home-interest & property tax deductions. 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). But I’m neither a CPA nor an attorney. Make sure you talk to those guys.
Many homeowners are also taking advantage of the ability to consolidate credit card debt and roll it into a home equity loan.
(Uh-oh. I’m beginning to sound like an ad on the radio. “It’s the biggest no-brainer in the history of mankind!”)
The main advantage is deducting 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. Thus homeowners can manage debt and improve their financial situations. Of course, you need to remember that you are funding short-term purchases with long-term debt, and this is not a sound financial strategy for the long haul. Tip of the week: Live within your means.
That was taxing reading through that, wasn’t it? Let’s look at the market now. Last week it was cold and rainy, a good time to list your home but not so good running around looking at those new listings. In San Benito County, there were 34 homes coming onto the market, and only 13 purchase contracts accepted by sellers. Inventory stands at 211. In South Santa Clara County the souls seem hardier. Only 32 new listings came on board and 39 purchase contracts were signed. Inventory stands at 301.
With higher inventories sellers have to be more patient. We are seeing some price reductions, but the overall sales data has not shown a downward pricing trend. Rather, the up-up-up mentality of the past few years has been replaced with a more reasoned approach to pricing a home for sale.
If you are considering buying or selling a home this year, it’s important to work with a good local real estate professional. Investing a little time in finding the best Realtor for yourself will pay off in the long run.
And be kind to your Realtor. He or she is probably trying to figure out taxes…
