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Content Overview

Owning A Residence: Advantages and Disadvantages



There are advantages and disadvantages to owning a residence whether it's a free standing home or an apartment.

Advantages include:

  • Potential source of income by renting all or a portion of your home.
  • Equity build-up. Instead of giving money to a landlord, each monthly payment builds equity that belongs to you.
  • Tax advantages. As a general matter:
    • You can deduct interest you pay on your mortgage and home equity financing.
    • You get a deduction for property tax payments.
    • You can exclude in 2010 up to $250,000 of gain ($500,000 for married couples filing a joint return), when you sell your main residence.
    • If your estate is worth more at your death than when you purchased it, your heirs receive a "stepped-up" basis. This means the value of the property when included in your estate becomes their cost basis, instead of your actual cost. No tax is payable on the difference between what you paid for the property and the new higher valuation. For example, you purchased the house for $200,000. It's valued in your estate at $300,000. When the property is sold, your heirs can claim $300,000 as their basis (cost) and no one pays tax on the difference between $200,000 and $300,000.
  • Debt leverage because the purchase of home only requires a small down payment compared to the overall cost of the home. Sometimes no down payment is required.
  • Inflation hedge because historically, prices of homes in America tend to climb over the long haul. Historically, home prices appreciate faster than the cost of living.
  • You may be able to increase your life insurance despite your health condition by securing mortgage life insurance on a non-medically underwritten basis.
  • Residences are protected to a degree if you have to go into bankruptcy. In some states, such as Florida, a home is exempt from your creditor's reach no matter how expensive the home is.
  • A home is not counted as an asset in determining eligibility for Medicaid. In fact,  putting money in a home is one way to do Medicaid advance planning.

Disadvantages include:

  • The older the house, the more likely to need constant maintenance - including those days when you don't feel well. This can be very stressful in addition to being physically demanding. Some problems cannot wait until you're feeling better.
  • Real estate is basically an investment with low-liquidity. It can take 10 or 12 weeks or more to sell a home. You may be able to get money invested in a home out quickly through a Home Equity Loan - but that will always be for less than the total value of the home.
  • Real estate can be risky if you have to sell at a particular time. It's difficult, if not impossible, to determine value of a home before you need money.
  • Owning a residence can be expensive.
    • There are property taxes to pay.
    • Year to year maintenance.
    • Unexpected events when parts of the house or appliances need repair and/or replacement.
  • If you die and your residence is included in your estate, your heirs may not get the full value. Studies indicate that your heirs may typically expect to receive only 75% to 80% of the fair market value. People who administer estates (Personal Representatives or Executors) may be motivated to close your estate as quickly as they can with as little work on their part as possible - instead of waiting and/or negotiating for the best possible terms.

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