It could be said that owning a home is the gateway to being middle class. It opens up many benefits not available to lower incomes.
Benefits of Itemizing Deductions
When it comes to filing income taxes, owning a home is a major step forward in being able to take advantage of itemizing deductions. Of course home prices may differ across the country, but in most cities the home mortgage interest deduction will place a married couple above the standard deduction amount.
For a single filer this is even more likely to be the case. The advantage to itemizing taxes is that it enables middle-class people to lower their tax burden by doing things that improve their life.
For example, it becomes easier to deduct things like work related professional development courses, property taxes, certain work related trips, large medical bills, donations to charity, political contributions, and many others.
Perhaps the first thing people realize when they decide to buy a house is that instead of paying rent to a landlord, they will be paying for their house.
At the end of thirty years, the renter is still in the same place financially, but the homeowner owns a house. It is also true that after ten years homeowners with a thirty year mortgage has paid off a large portion of that mortgage.
They can then either sell the house and cash out on the equity they have created, or they can borrow more money against that equity.
The benefit of real estate is that if the homeowners turn around and use all the money from selling a house to purchase another house, they will not have to pay taxes on the profit from the house sale.
Many recent graduates may not have enough money for a large down payment, or they might not have a high enough income to qualify for a mortgage on their dream house. If this is the case, they should still buy a smaller house or apartment that they can afford. They could also purchase a rental in a less expensive neighborhood.
The magic of renting out an apartment is that another person is paying to build you more equity. As an added bonus, the interest, taxes and upkeep on a rental are fully deductible if income is in a certain range. Depreciation equal to 1/30th of the property’s value per year is also deductible.
On top of all this, if the property is a rental, it is on a different schedule for income tax purposes, and other standard or itemized deductions can still be taken in addition to those taken for the rental property.
With all the benefits of owning a home, it is best to begin as early in life as possible.