As you prepare to file your 2019 taxes, it is important to note that the standard deduction for 2019 was raised to $12,200 for single taxpayers and $24,400 for married filing jointly. Married filing separately pays the same as single. As you work through your taxes, whether by professional or by tax program on your computer, you may start to realize that the standard deduction is a better deal than itemizing. This may lead you to believe that owning a home is not the great investment that is used to be. Let me dispel the rumor!
Homeownership is still one of the best investments you can make if we look at the other advantages of owning a home.
For example, if we propose a $275,000 home financed with a 4.5%, 30-year FHA loan, it will have an approximate total payment of $2,075. The difference in the value of the home and the amount owed on the mortgage is called equity. Two things cause equity to increase: the home appreciating in value and the principal loan balance being reduced with each payment made on an amortizing loan.
In this example, if we were appreciating the home at 2 percent annually, the value would increase by $5,500 the first year which would be $458.33 per month. At the same time, with each payment made, an increasing amount would reduce the unpaid balance which would average $363.00 a month in the first year.
The homeowner’s equity would increase over $800 a month. Instead of paying their landlord’s mortgage, the homeowner is building equity in their own home. The equity becomes a forced saving and lowers their net cost of housing. In seven years’, time, the homeowner in this example would have $80,901 in equity instead of seven years of rent receipts. Thus, showing a higher rate of return on investment than most stock market funds.
This example does not take into consideration any tax advantages. If the homeowner would benefit from itemizing their deductions, it would lower their cost of housing even more.
The IRS recommends each year to compare the standard and itemized deductions to see which would benefit you more. Items such as substantial charitable donations (percentage limit is 60 percent), mortgage interest, property taxes and large out-of-pocket medical expenses (the floor for medical and dental expenses rose to 10 percent, which is 10 percent of your AGI) could increase the likelihood of itemizing deductions. As stated previously, you can work with your tax professional or use a tax program to do these comparisons. The tax programs will automatically do the comparisons and suggest the right course of action.
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