Should I Buy or Should I Rent? 5 Tax and 5 Non-Tax Considerations

In this economy, more people are looking at renting a home or apartment instead of buying a home.  While my primary focus is on taxes, there is always much more to consider than just tax consequences:

  1. Can you afford it?  This is the single most important question to answer.  Regardless of the available tax deductions, if you can’t afford the house, don’t buy it.
  2. Chances are, your rent payment will increase over time, to keep up with inflation.  Mortgage payments will stay the same over the course of the loan (on a fixed-rate mortgage).
  3. How long do you plan to live in the home?  If it’s likely that you’ll be moving out within 3-5 years, buying may not be the best option.  Renting is usually cheaper in the short term.
  4. Responsibility for repairs, maintenance and property taxes.  If you rent, the landlord pays for repairs, maintenance, property taxes, insurance, etc.  (True, those costs might flow back to you in the form of higher rent, but the ultimate responsibility for finding the cash to pay the expenses lies with the landlord.)
  5. Equity.  If you own a home long-term, you should end up with equity built up in the home.  If you rent long-term, you’re not building up equity.
So with the non-tax considerations out of the way, here are some tax considerations to think of:
  1. Interest paid on your mortgage is deductible as an itemized deduction.  So if you are in the 15% tax bracket, you are saving $150 for every $1,000 in interest you pay.  Any “points” you pay are generally also deductible.  The “principal” portion of the mortgage is not deductible.
  2. Property taxes paid on your mortgage are also deductible as an itemized deduction.
  3. Interest paid on a home-equity line of credit is also generally deductible.
  4. If you have lived in the home for at least 2 out of the last 5 years, the first $250,000 of gain ($500,000 if married) is tax-free when you sell the home.
  5. If you get in the position to buy a second home, the interest and property taxes on the second home are also deductible.  (A second home can include RVs and boats….)
Forbes on-line recently had a good discussion of renting vs. buying.  You can find that article here.