My Personal Finance Journey

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Home, The Mother Of All Tax Shelters

Contributed by mm | November 11, 2004 7:58 AM PST

Jeff Schnepper put together a list of tax benefits associated with homeownership. His list includes:

- Deduction on property tax
- Deduction on mortgage interest (first $1 million on mortgage and first $100,000 on home-equity debt)
- Gain exclusion: the first $250,000 gain (or $500,000 for joint return) is excluded from tax if the property was your principal residence for any two of the five years prior to sale.
- Home offices: Even if you use part of your home as home office, you are still entitled to the huge gain exclusion. Over the years you use the home as home office, you can deduct certain depreciation (although you need to pay back the depreciation tax benefit upon sale)

Being a homeowner for 15 months now, I see some more personal finance benefits beyond those tax gains:

- Forced Saving: It does not apply to me who will save anyway, but for people with loose purse strings, monthly mortgage payment is a way of forced saving.
- Access to Cheap Capital: Mortgage and home equity loans, with the above-mentioned tax benefits, gives one access to cheap capital. With HELOC, you can leverage your home equity at an effective interest rate much lower than you will get from a credit card or a personal loan.
- Appreciation Potential: I am not counting on massive 30% annual gain on my propety value, but even a modest gain of 5%, multiplying by the leverage I have in my mortgage, is a substantial return on my down payment. (My home has rewarded me over 10% gains over the last 15 months, although only a small part of the gain is shown up in my net worth calculation.)

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