We recently posted Real Estate: Today’s Golden Opportunity comparing the current housing market to the market for gold about a decade ago.
However, since the subject of comparing real estate to other investments has come up, let’s take a closer look. There are two major advantages to investing in a home of your own rather than another option:
You Can’t Live in Your IRA
When you buy your own home you are not taking available dollars away from another investment.
You are replacing one housing expense (rent) which has no potential for a return on investment with another (mortgage payment) that does give you an opportunity for a return.
We realize that there has been research showing that over the last 30 years renting has been less expensive than owning. That research also says that if you invested the entire difference between the rent payment and mortgage payment you may have done better financially.
There are two challenges with this conclusion:
- Today, in the vast majority of the country, renting is actually more expensive than owning a home.
- History has proven that tenants DO NOT invest the difference in their rent and mortgage payments.
Today, study after study shows that owning a home is no more expensive than renting a home. However, even if this wasn’t the case, history shows that owning a home creates greater wealth.
Paying a mortgage creates what financial experts call ‘forced savings’. The Joint Center for Housing Studies at Harvard University released a study last year titled “America’s Rental Housing: Meeting Challenges, Building on Opportunities.”
In the study, they actually quantified the difference in family wealth between renters and homeowners:
“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”
There Are Tremendous Tax Advantages to Investing in a Home
There is no doubt that selling an investment such as gold is easier than selling your home. However, this liquidity comes at a price. The price is called capital gains. That is the tax you pay on any financial gain you receive from the investment. This tax doesn’t apply the same way when you sell your primary residence:
Theresa Palagonia, a CPA and the Accounting Manager for the firm G.S. Garritano & Associates, was good enough to explain the Home Sale Exclusion Rules:
“You may qualify to exclude from your income all or part of any gain from the sale of your main home.
You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:
- You meet the ownership test.
- You meet the use test.
- During the 2 year period ending on the date of the sale, you did not exclude gain from the sale of another home.
If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions listed above.
You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements. (Special rules apply for joint returns.)
Ownership and Use Tests
During the 5 year period ending on the date of the sale, you must have:
- Owned the home for at least 2 years, and
- Lived in the home as your main home for at least 2 years
Certain exceptions exist in which you may qualify for the exclusion without satisfying the tests listed.”
Every investment has pros and cons. That is why there is such an assortment of great opportunities. Real Estate has been, is and always will be one of those opportunities.
— Reposted with permission of Keeping Current Matters
About The Staten Island Board of REALTORS® (SIBOR)
The Staten Island Board of REALTORS® (SIBOR) is the largest not-for-profit trade association in Staten Island, N.Y.
SIBOR exists to enhance the ability and opportunity of its members to conduct their business successfully and ethically; and to promote the preservation of the public’s right to own, transfer and use real property.
Comprised of over 1,800 members, SIBOR serves real estate agents, brokers and affiliated professionals throughout the borough and surrounding areas.
SIBOR is the provider of the Staten Island Multiple Listing Service (SIMLS), which works as a clearinghouse through which more than 250 local real estate firms exchange information on properties they have listed for sale. Together, its members participate in over 3,000 real estate transactions every year.
All SIBOR members belong to the New York State Association of REALTORS® (NYSAR) and the National Association of REALTORS® (NAR).
SIBOR may be reached at 718-928-3220 and visited online at http://siborrealtors.com/.