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President Bush's 2003 tax cuts did more than put some money back in people's wallets. For lots of folks, it also reduced-and in some cases, eliminated-the tax benefit they got from owning a home.
That certainly wasn't the intent of the legislation. But by lowering tax brackets and, more importantly, boosting the standard deduction for married couples filing jointly, it certainly was the result. That shouldn't cause you to shelve your plans to buy a house, however. The tax benefits to home ownership have long been exaggerated.
Benefits of home ownership
Fortunately, there are a lot of other good reasons to own a home. One of the best, financially speaking: the chance to benefit from appreciation as the value of your home (one would hope) rises through the years. Over the past 30 years, houses have appreciated, on average, six percent a year.
All calculations on home value come with caveats:
• House hoppers won't get all of the benefit. Every time you change homes, you lose about 10 percent of the value to selling and moving costs.
• Out-of-control spenders can still lose. If you drain off every dollar in appreciation through home equity loans and lines of credit, you aren't building wealth, you're destroying it.
• Home prices don't always appreciate. Sometimes they plateau or even decline.
Rent vs. buy calculators
Since December 31, 1998, the S&P 500 is down 7.2 percent. But my home in the insanely hot Southern California market has appreciated about 65 percent. There's no way I could have predicted the performance of either market-stock or real estate-in advance. Yet most of the "rent vs. buy" calculators you find on the Internet pretend that you can, and these base their results on those crystal-ball assumptions.
That's not their only flaw. Just like many first-time buyers (and even some long-time homeowners), the calculators tend to ignore or underestimate the total costs of owning a house. Outlays for maintenance, repairs, insurance and utilities almost invariably will be greater for a homeowner than a renter, yet many calculators fail to consider the full impact of these expenses.
How you can win by owning
You're most likely to win by owning, rather than renting, if the following are true:
• You plan to stay put at least three years and preferably more. In most markets, it can take three to six years for a home to appreciate enough to offset the costs of selling and moving.
• You're psychologically prepared. Home ownership means dealing with whatever comes up-from noisy neighbors to clogged plumbing. You can't just pack up and move as easily as when you were renting or call the landlord for help.
• You have some extra savings. Home buyers who spend every dime they have buying a house inevitably get blindsided by repairs, maintenance and all the other costs of owning a home. Smart home buyers make sure they have an amount in savings at least equal to two mortgage payments after the deal closes, and preferably much more.
Remember, if you're the kind of person who lives on credit cards and doesn't know where the money goes, you'd be smart to clean up your financial act long before you go hunting for a house.
For more information and tools that can help you get a better handle on the costs of owning a home vs. renting, visit the Banking Center on MSN Money (http://money.msn.com), or track your accounts and bills in Microsoft Money software.
There are benefits to both home ownership and renting.
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