Some myths about home ownership can cost you money

The expense of home ownership myths

Buying and owning a house is expensive; there’s no way around that. Unless you win the lottery or just happen to be named Bill Gates, you’ll have to take out a loan and make monthly payments for several decades, just like everyone else. It’s expensive, but everyone needs a place to live. But there are smart ways to buy and not-so-smart ways to buy. And then there are the myths about home ownership that can steer people in the wrong direction and possibly cost them money if they aren’t paying attention.

Here are some example of myths that persist about home ownership:

• Mortgage interest is good because it reduces your taxes - Not really true. Interest is always going to cost you money; it’s the price you pay for using someone else’s cash to buy your house. The mortgage interest tax deduction doesn’t pay for your interest, it just reduces the amount you actually have to pay. If you are in the 28% tax bracket, you will effectively get a 28% discount on the amount of interest you pay. You still have to pay the other 72%, though, so the lower the rate, the better off you are. And keep in mind that this discount only applies to that interest that exceeds the standard deduction, which for 2006 is $5150 for single filers and twice that for married couples. Many people won’t even qualify to itemize; they’ll just get the standard deduction. For many people, the mortgage interest deduction is an overly hyped perk of home ownership. It’s nice, but many people don’t benefit from it in any way, so there’s no reason to pay even one cent more than you have to. Bottom line: less interest is better. 

• All costs associated with home ownership are tax deductible - It would be nice if it were true, but it isn’t. You can’t write off all of the costs of owning a home. Mortgage interest? Sure. Private mortgage insurance? Nope. And that occasional coat of paint or air conditioning repair are just part of the cost of home ownership, and those expenses are yours alone. Anything you pay to increase the value of the home should be noted; you can add it to your “cost basis” when you sell the house. If you pay $100,000 for the house and add a $25,000 gameroom, you can effectively claim the cost of your home to be $125,000 when you sell it. That has some useful tax ramifications.
• You can write off a loss if you sell your home for more than you paid - Sorry. That one won’t wash with the IRS. As personal property, the value of your house is not deductible if you lose money on it when you sell. Unfortunately, in one of those quirks that only members of Congress understand, you are liable for any gains you make when you sell. Lose money? You’re on your own. Make money? You’ll have to pay taxes. That’s life in America.

The best benefit of owning a home is that you have a place to live. There are some financial benefits, particularly if you buy in an area that’s rapidly growing, but many of the so-called “benefits” are really just myths.