Should You Buy Or Rent

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Buying a home is a rewarding experience. You derive a great deal of personal satisfaction from owning a home. Homeownership allows you to build up your personal net worth over time. Moreover, long-term increases in housing prices nationwide makes homeownership a relatively attractive investment.

In some cases, renting may be a more attractive option. For example, if you plan to move in a year or two, you are unlikely to recover the closing costs you pay when you buy a home. In addition, finding a home to buy generally takes more time than looking for an apartment to rent.

In addition to building up equity over time, owning a home offers significant tax breaks. The interest expense that you pay on up to $1 million in home mortgage debt ($500,000 if you are married and filing a separate return) is tax-deductible.

Your tax savings from the mortgage interest tax deduction are greatest in the early years of a mortgage loan. For example, on a 7%, 30-year fixed rate mortgage loan of $100,000, you pay $6,968 in interest the first year of the loan. If you are in the 25% income tax bracket, your tax savings are $1,742. In Year 16 of the loan, you pay $5,090 in interest, which saves you $1,273 in taxes. In Year 24 of the loan, you pay $2,926 in interest, which saves you $732 in taxes.

When you sell your home, you can exclude up to $500,000 in capital gains if you are married and filing a joint return. (The exclusion limit is $250,000 for other tax filers.) You will need to pass the IRS's ownership and use tests to show that the home has been your primary residence for at least two of the past five years. In addition to mortgage interest, you can also deduct your local property taxes on your income tax return.