There is a large taxation benefit to owning a home versus renting... is the capital gains exemption. The first $250 K of profit ($500 K if you're married) from your primary home sale is exempt from capital gains taxes. If you make $500 K on your home sale, that is $75,000 (at the 15% long term capital gains rate) that you don't have to pay... If your choice is between purchasing a primary home and investing in a taxable account, and you plan to sell the asset (house or mutual funds) before you die, then the $75 K is a significant benefit.
I don't think I agree. Earlier in the same page it says that "the average annual real (net of inflation) increase in home prices was a mere 0.40%". If that is true, the exemption from capital gains just means the 0.40% real return is fully realized. But that's still a miserable return. A generic balanced mutual fund, even on a taxable account, should easily beat a 0.40% real return. The $75K are not a "significant benefit"; it's just inflation.
Do you agree with me?
Note: I'm not saying that buying a home is a bad idea. I'm just making a very narrow comment about this particular point made in the wiki.
You have to pay taxes on the inflation portion of capital gains in all other investments. While the real return of houses may be small, the inflation-included gain is much larger. You can also leverage housing in a safer mode (no margin call) than with stocks and bonds. That juices your returns.
That small number also does not include the rent you are not paying when you own the house you live in. Put another way, if you rent, you have to pay income tax on the rent money you spend. There is no tax on the rent you don't pay by owning.
bberris wrote: ↑Sat Dec 16, 2017 7:14 am
You have to pay taxes on the inflation portion of capital gains in all other investments.
I know. I thought I implied as much in my post. What I'm saying is that any decent mutual fund, even with full tax drag, could easily beat 0.40% real retrun.
If cap gains on a house were taxed, your post-tax return would be negative. The tax exemption just keeps the 0.40% from going into negative territory. This isn't a "significant benefit" of owning a house; it is "[(removed) --admin LadyGeek] I'm glad we didn't lose money on this thing".
That small number also does not include the rent you are not paying when you own the house you live in.
It doesn't include many things. I explicitly added a caveat that I was not claiming that owning a home is a bad idea. I explicitly said that I was making a narrow comment about this one section of the wiki. There are many other pros and cons to owning vs renting.
chevca wrote: ↑Sat Dec 16, 2017 6:08 am
It's not talking about returns. It's talking about taxes. Not many other places to get $250k or $500k tax free.
If the return is just "inflation + 0.4%", the tax exemption is just there there to keep you from losing money. Those $500K are not real. It's just the reduced value of the dollar. Thinking that you are making money is bad thinking.
The capital gain advantage only applies to homes used as an investment.
When I purchase the home I like and I don't sell it, I couldn't care less of capital gains.
It reminds me of those who buy cars based on depreciation. I'm not in the business of selling cars, but in the one of enjoying driving them. Therefore depreciation doesn't matter to me.
Thesaints wrote: ↑Sat Dec 16, 2017 2:06 pm
The capital gain advantage only applies to homes used as an investment.
When I purchase the home I like and I don't sell it, I couldn't care less of capital gains.
It reminds me of those who buy cars based on depreciation. I'm not in the business of selling cars, but in the one of enjoying driving them. Therefore depreciation doesn't matter to me.
I purchased a home 30 years back. Planning to sell FY18 (downsizing), at a price (constant dollars) roughly equal to what I paid for it. Capital gain, in this case, is simply inflation :: devaluation of the dollar. Would be .. less than pleased .. paying taxes on phantom income.
The comparison is renting vs owning a house. Not owning a house vs owning stocks. The comparison to equity returns is completely irrelevant in this respect.
chevca wrote: ↑Sat Dec 16, 2017 6:08 am
It's not talking about returns. It's talking about taxes. Not many other places to get $250k or $500k tax free.
If the return is just "inflation + 0.4%", the tax exemption is just there there to keep you from losing money. Those $500K are not real. It's just the reduced value of the dollar. Thinking that you are making money is bad thinking.
I agree with the making money statement. Especially after factoring interest paid, repairs, upkeep, and all. Not often one makes a whole lot on a house. But, how many things in the dollar range of a home can you buy and later sell for a profit tax free? You're simply comparing too many things.
Are you looking at this as, someone has $100k and could put it down on a house or invest it.... who has more after 20 years on that $100k?
Also, there's a timing deal involved. Ask some folks that bought a house on the west coast 5 or so years ago and want to sell now how they made out and if they appreciate the tax exclusion selling a primary home.
Thesaints wrote: ↑Sat Dec 16, 2017 2:06 pm
The capital gain advantage only applies to homes used as an investment.
When I purchase the home I like and I don't sell it, I couldn't care less of capital gains.
It reminds me of those who buy cars based on depreciation. I'm not in the business of selling cars, but in the one of enjoying driving them. Therefore depreciation doesn't matter to me.
I purchased a home 30 years back. Planning to sell FY18 (downsizing), at a price (constant dollars) roughly equal to what I paid for it. Capital gain, in this case, is simply inflation :: devaluation of the dollar. Would be .. less than pleased .. paying taxes on phantom income.
Since banknotes do not multiply by themselves to follow inflation, it is actually real income.
JBTX wrote: ↑Sat Dec 16, 2017 4:05 pm
The comparison is renting vs owning a house. Not owning a house vs owning stocks. The comparison to equity returns is completely irrelevant in this respect.
As I said, I am not saying that owning is or is not a good investment.
OP: I agree with your observation. The key to making money in home ownership or more precisely not losing money in home ownership it’s not at what price did you sell a house for but at what price did you purchase it. I have always found the math behind home ownership to be underwhelming.
There are many good reasons to own a home over renting, but they are not financial.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.