The concept of home ownership seems to be entrenched in the psyche of Americans and most people consider owning a home as being one of the best ways to accumulate wealth. Moreover, for most Americans, housing represents their largest financial expense. As such, it is not surprising that the question of whether it makes more economic sense to rent or to buy has been studied repeatedly over the years. The 2017 Tax Cuts and Jobs Act (TCJA) brought the subject to the forefront once again, since the changes enacted may limit some of the tax advantages of home ownership.
Tax Cuts and Jobs Act
Under that new tax law, state and local income taxes and property tax deductions (SALT) are capped at $10,000, which for some will change the calculation on the benefits of home ownership. This is particularly the case for double-income married couples who file jointly, since the dual income will likely mean at least some of their state and local income taxes will no longer be deductible. Those who live in areas of the country with high property taxes are similarly impacted, causing some portion of their property taxes to no longer be tax deductible.
The mortgage interest deduction is distinctly beneficial when considering home ownership, so when the TCJA capped the mortgage interest deduction on loans at $750,000 for first and second homes this added another dis-incentive to home buyers in high-priced markets. For anyone who had a mortgage in place before December 31, 2017, the mortgage interest deduction remains capped at $1,000,000 of mortgage loans.
It may be surprising to learn that landlords and/or homeowners who rent out their homes for part of the year are significantly less impacted by these new laws. This is because property taxes connected with rental properties, no matter the amount are included on Schedule E as part of the cost of doing business. Rental properties also do not fall under the cap on mortgage interest deductions. The question is whether or not landlords will pass along this deduction to the renter in the form of lower rent.
The tax advantages of home ownership will likely be reduced for many, including for those who itemize deductions. Consequently, other factors will take on more importance in the rent versus buy decision.
By far, one of the most important considerations in whether to buy or rent is how long the buyer plans to be in the home: longer timeframes favor buying, while a short time horizon generally points to renting. There is a higher probability that your investment will be a positive one if you own your residence for over 5 years. Remember to factor transactions costs for both the purchase and sale in your calculation. The longer you own the home, the more years over which you can spread these costs.
Individual market conditions might also alter the traditional decision to rent or buy. Supply (inventory), health of the local economy, employment opportunities, demographics and schools can all drive home prices in a particular community. Understand the current environment and underpinnings before plunging into a purchase.
Here are some additional reasons to consider buying, followed by some factors that support renting.
Pros for Buying
• Forced savings (part of mortgage payment pays for principal, building equity)
• Possibility of home value appreciating (builds equity)
• Sense of ownership
• Ability to upgrade (also may build equity)
• Inflation hedge (especially when the mortgage is fixed)
• Stability of locale (landlord can’t kick you out!)
Pros for Renting
• Fixed cost of housing (no homeowner surprises, but of course rent can increase!)
• No maintenance and repair costs or hassles
• No need to have saved a large sum of money for down payment
• Increased mobility, if you’re not sure where you see yourself in a few years
• No risk of depreciation
As with most things, each individual or family’s circumstances must be considered when making this very challenging decision. It is impossible to categorically state that renting or buying is the better option for procuring a roof over your head. By weighing each of these factors carefully, you will come to a decision that is right for your unique situation!