Let us count the ways…
By Mike Cotter | Email the author | April 8, 2011
Owning real estate has benefits unlike any other investment. Sure, there is no guarantee that real property will automatically begin to appreciate the minute we close escrow, but no investment has such guarantee. Even so called risk-less U.S. Treasury obligations are subject to market value fluctuations before maturity and are usually subject to risks of inflation. So we invest our money as we choose.
But the advantages of a real estate investment are unique and sizable.
First of all, we all have to live somewhere, and shelter is not cheap. Investing in a home allows us to live in our investment. Over a long period of time, this usually results not only in a positive return on our capital, but also is “free rent” while we live there. That’s huge.
Of course, if we have to borrow money to buy a home, the monthly interest payments on the debt can be substantial. But we get an incredibly low interest rate compared to other sources of credit. Where else can we borrow money for 30 years at an annual fixed rate of less than 5 percent?
Also, taxpayers can deduct from their income home mortgage interest up to $1 million annually. This benefit alone often makes the monthly cost of owning a home with a mortgage less expensive than the nondeductible monthly rent of a similar home.
As for annual California property taxes, they can be substantial for new homeowners—at about 1 percent of the market price paid for the property. But over time, Proposition 13 allows the tax bill to grow at no more than 2 percent per year. So, as property values rise and inflation erodes the dollar, the property tax bill becomes a relatively minor consideration.
Owners of historic properties can apply for a Mills Act agreement with their city that can cut their property tax by 60 percent in some cases—if they agree to preserve the properties. San Clemente has such a program with 65 of the city’s 206 historic properties participating.
Adding frosting to the cake: If we sell a home and trade down to a less expensive home after reaching age 55, Propositions 60 and 90 often allow us a one-time opportunity to transfer our relatively low existing tax bill to our new home. That’s huge.
When we sell most investments at a gain, we usually have to pay capital gains tax. Not so with real estate used as our primary residence. A federal law passed a few years ago allows up to $250,000 in capital gains tax forgiveness for each property owner. So a married couple can get a $500,000 capital gain on their home without paying any capital gains tax. That’s huge.
But, let’s say our property investment doesn’t turn out very well. For one reason or another we end up defaulting on the loan we obtained to purchase our home. Unlike with other investments, lenders generally have no recourse other than repossessing the real estate in collecting the bad debt. California home lenders usually have to forgive any deficiency they suffer in collecting the original “purchase money” loan. That’s huge.
Further, while a forgiven loan has always been considered taxable income in the past by the IRS, current law in most cases prevents federal and state taxation of a forgiven home loan, at least through 2012. That’s really huge.
Disclaimer: I’m not an attorney. This is a very general and incomplete review of some of the benefits of owning real estate. Always consult with your tax attorney and CPA when making decisions with respect to real estate.
For more of the latest market news and statistics on San Clemente real estate, visit my blog atSanClementeRealEstateBlog.com or MCotter.com.
Original article at http://sanclemente.patch.com/articles/how-do-we-love-real-estate-benefits