Home Ownership: The Good and the Less Good
Homeowners have every reason to feel good about, well, owning a home. It's a stable environment in which to raise a family, a source of pride and, potentially, decades of pleasure. But like a coin, home ownership has two sides.
The good: tax breaks
When it comes to tax savings, there's no place like home. As a homeowner, you're eligible for an annual tax deduction for mortgage interest and property taxes. But a majority of households take the standard deduction, so those tax savings go unused.
The big tax break is when it comes time to sell a home. Currently, single homeowners can claim up to $250,000 in profits free of capital gains taxes; for couples, it's up to $500,000. And for profits above these limits, homeowners pay at the capital gains tax rate, which can be lower than the rate on regular income.
As with all government "gifts," there are some strings attached. Essentially, you have to have used the home as your personal residence for at least two out of the five years preceding the sale to qualify for the full capital gains exemption. There are other twists and turns in the law, so be sure to call on a tax attorney or accountant before you count your profits.
The less good: home ownership costs
Here are three examples of things your home won't tell you:
- That the roof will need to be replaced in six years, the furnace in two and the refrigerator next week.
The point is that there will always be ongoing (and sometimes increasing) expenses attached to owning a home. Many of them are on top of your monthly mortgage payment and will continue long after that mortgage is paid off as long as you live in the house, in fact. So, for example, the idea that housing costs decline to near zero in retirement is a myth.
To get a clearer picture of just how much you may need to save for some of these added costs of home ownership, consider the expected life spans of the major components of your home:
- Major appliances (refrigerator, stove, washer, etc.): 10-15 years
- Heating and cooling equipment: 15-20 years
- Paint: 7-10 years, though homeowners often paint more often
- Roofing: 20-30 years for asphalt, cement fiber and wood
- Windows: 15-30 years, depending on the material and quality
- Flooring: 8-10 years for carpet; 15-20 years for vinyl
Some simple math will tell you when you can expect to replace these items. What makes budgeting a bit tricky is figuring how inflation will affect the cost of replacement, especially if the purchase will likely be made more than five years in the future.
But there may be a silver lining to replacement costs: You may be able to deduct the money you spend on repairs (and improvements) from your profits when you sell your house. Just be sure to keep those receipts.
Take the next step...
Know where to turn. Tap into your home's equity with a home equity loan or home equity line of credit from the Principal Financial Group.
