Saratoga News

Homes

Examining the many benefits of owning a home

Bush has vision of 'ownership society'

By Rose Meily

President Franklin Delano Roosevelt once said a nation of homeowners is unconquerable. Margaret Thatcher, with a mantra that homeowners become responsible citizens, privatized and moved 1.7 million families from public housing into private ownership. President Bush has said ownership has the power to transform people. Thus, the promotion of homeownership has been an integral part of Bush's vision of an "ownership society," and he has proclaimed June "National Homeownership Month" to raise awareness of homeownership and encourage more Americans to consider the benefits of owning their own home.

"Owning your own home is the best financial move a person can make; it's better than having dollars in the bank," according to Los Gatos Realtor Diane Bogart of Coldwell Banker.

Bogart enumerated the advantages of homeownership. "You build equity, and you get the best rate of return over time. In some cases, the return on some homes is 100 percent after a few years. Over the long haul, the value of a home always increases."

Homeownership reaps well-established tax benefits. Homeowners not only enjoy a roof over their heads, they have a long-term nest egg investment and are able to save on their taxes because of it. Because of the Mortgage Interest Deduction portion of the federal tax law, homeowners are allowed to reduce their taxable income by a sizable amount. But how much do homeowners actually save? How much more do they save in taxes over their renting counterparts?

In the last several years, the homeowners' equity gains--in other words, "return on investment"-- have increased steadily, with an average return of more than 20 percent per year because of record increases in home prices. Make that comparison with stock portfolios or even 401k performance, and real estate offers quite a good return on investment.

Along with home equity gains and overall appreciation, there are other huge tax advantages to owning a home--interest and property tax deductions. For example, a homeowner who has purchased a home at the median price in 2005 would have paid $524,020 for that home. With property taxes at the going rate of about 1 percent of the property value, the property tax deduction for that home would be approximately $5,240 a year. In the first 12 months, the interest paid on that home loan would total $24,470 (interest calculated assuming a 20 percent down payment with 5.87 percent fixed-rate mortgage--Freddie Mac). Therefore, that homeowner's total MID and property tax deduction for the first year of homeownership would be $29,700. If the owner falls in the marginal 25 percent tax bracket, the total tax savings in the first year of owning the home would be around $7,430 ($29,700 interest paid and property taxes multiplied by the 25 percent marginal tax bracket).

The IRS allows the homeowner to deduct the entire amount of interest paid on a home loan up to $1 million ($500,000 if married filing separately) as long as the owner includes Schedule A on IRS form 1040, the loan is in the owner's name and the mortgage is secured by collateral (usually the home itself--IRS Publication 936). The long-run tax savings would be more than $36,000 if the homeowner holds on to that home for five years (assuming no change in the tax bracket).

Put differently, the current tax system helps homeowners because it makes homeownership more affordable. Compare two different households--a first-time buyer household and a renter household:

The first-time buyers bought their home during 2005 for $445,400 (assuming 85 percent of the median price in California for 2005). After accounting for mortgage interest and property tax deductions, the taxable income would be $87,150. Assuming these new homeowners had no other deductions, their total taxes owed to the IRS would be approximately $15,120 (for married filing jointly).

The renter household with the same earnings and marital status would have a taxable income of $105,000--higher than that of the homebuyer household because they do not have any mortgage interest or property taxes to deduct (assuming the standard deduction for 2005 of $10,000). Under these same assumptions (holding all else constant), the renter household pays approximately $19,580 in taxes. Because of the interest and property tax deduction, homeowners are able to reduce their taxable income and achieve almost $4,500 in tax savings.

The benefits of homeownership go beyond the checkbook or 1040 forms. According to "Social Benefits of Homeownership and Stable Housing," a study published by the National Association of Realtors, high and stable homeownership rates contribute many important social benefits by boosting the quality of living in areas such as education and civic involvement, while lowering the crime rate and welfare dependency. Homeowners not only reap the many advantages when tax season comes around, but also bask in the social benefits homeownership brings to their communities.

Like Bogart, Brian Bernasconi, a Realtor with Alain Pinel Realtors in Los Gatos and the Los Gatos/Saratoga district chairman of the Silicon Valley Association of Realtors, said a home is the best investment a person can make. The small-town feel of the Los Gatos and Saratoga communities especially draw people to the area, as well as the architectural diversity, the great schools, good restaurants and downtowns.

"In Los Gatos, people have the opportunity to live here at a variety of income levels," Bernasconi said. "There are homes that are under $1 million, and there are homes that are priced as much as $10 million on 36 acres."

Bogart, who has lived in Los Gatos for 21 years, said homes in the Los Gatos and Saratoga areas have appreciated well. She pointed out the value of homeownership in these areas. When you own a home in these communities, she noted, "You become part of the community. You get involved in the community's rummage sale or neighborhood block party. You own a piece of the community and become more involved."