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The American dream has always been the act of purchasing a home. While finally owning your own home and breaking free from paying rent to your landlord month after month is satisfying, home ownership comes with quite a few perks.

Owning a home not only gives you a few huge tax breaks, it also acts as an investment vehicle to store and grow your wealth.

Mortgage Interest

Owning a home with a 15 or even 30 year mortgage can result in a large interest payment over time, depending on your fixed rate. Those who went with variable mortgage over the past 5 years have paid dearly in monthly expenses as we see lending rates rise from 3.4% up to 4.85% and still climbing.

Source: YCharts

The good thing about the US tax law, is that homeowners are entitled to tax write offs for the interest paid on home loans, 100% for up to $750,000 in debt. So, If you had $500,000 owed on your mortgage and your interest payment annually was $22,500, you would be able to fully write it off.  If you use married filing separate, the debt limit is cut to $375,000. There are exceptions for grandfathered mortgages as well.

There may be confusion here, however. You are not able to deduct your mortgage payment, but rather the interest portion of that payment. Generally speaking, if you are paying on a newly minted 30 year mortgage, most of your payment is interest.

Equity Loans

A big benefit of owning real estate is that is the most trusted form of collateral for a loan. You can use the collateral of the equity in your home to borrow, creating a home equity line of credit. In other words, the amount that you have paid off on your mortgage is value that is yours, making you able to take a loan out.

Home equity loans can be used to acquire another piece of property and improve the property you are currently using, increasing the value of your investment. Home equity loans can even be used to pay bills in a pinch, though this is not commonly recommended.

If home equity loans are used to acquire or improve, the interest on these loans can be deductible up to the $750,000 previously mentioned. The caveat being you can only deduct the interest from loans on two properties. However if an equity loan is taken out to pay bills, it is no longer deductible.

Property Taxes

The IRS understands that property tax can be another burdensome factor on the middle class and homeowners and general. Because of this, they allow homeowners to write off up to $10,000 in sales & property taxes. This softens the blow a little for homeowners.

Capital Gains

Owning a home not only gives you a place to live, but a vehicle to store and grow your wealth. Inflation impacts many things, including the value of your home.

In Seattle, Washington median home prices rose from $360,000 in 2010 to $699,000 in 2018. That is a 194% increase in price. Seattle however is an outlier from the average increase in the average US home year-over-year of 3%. While there are no guarantees in the short-term, owning a home may be a viable store of wealth in the long run.

Normally, when you sell an asset at an increased value, you must pay capital gains tax. However, the IRS allows for a 0% capital gains rate for qualifying homes up to $250,000 in gains for individuals and $500,000 in gains for married couples.

The exemption rules for qualified homes are that it must be considered your primary residence, meaning you have lived there for 2 of the last 5 years. The other rule being that you can only do this once every 2 years.

1031 Exchange or “Like-Kind” Exchange

Another IRS code called the 1031 Exchange allows businesses and individuals sell investment property and buy another or “exchange” them tax deferred.

So if you had a rental property aside from your personal residence, you could roll it over and buy another property income tax free.

There are many rules and nuances involved with 1031 exchanges but there are two main rules to keep in mind.

The second property must be of equal or greater value, and it must be closed on in 180 days.

Rental Income

The great thing about real estate is that it fulfills the basic need for a roof over your head. Everyone needs a place to live, but not everyone can own property. If you own property, you can help fill this need in your community.

Let’s say you have an empty guest room, loft, or even basement. You could rent this space out to someone in exchange for monthly rent. The income from this rent is taxable, but if you use those funds to pay for repairs or improvements on your home, you can offset that income at least in part by the percentage of the repairs that correlate to the square footage of space that is rented. Repairs are 100% deductible for rentals, however improvements are considered capital improvements and are deductible in a different way through depreciation.

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