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Tradeoffs When Renting vs Buying

A timeless real estate question is whether someone should rent or buy a home. As with many financial decisions, there’s no one size fits all answer. It depends on your personal lifestyle preferences, long term plans, and financial goals. Let’s look into some recent changes in the tradeoff.

Buyers typically had the significant advantage of being able to deduct their mortgage interest payments and property taxes from their taxable incomes while building equity. This partly changed in December 2017, when the previous administration signed the Republican Tax Bill into law and reduced the tax incentive to buy.

The new law limited the amount of mortgage interest deduction to $750,000, down from $1 million. It also capped the deduction for state and local property taxes to $10,000. Vishal Garg, CEO of Better Mortgage, argued that “This tax plan would turn America from a nation of property owners into a nation of tenants renting from private equity-backed landlords.”

California’s recent Proposition 19 provided some tax benefits to homeowners who are 55 years and older or disabled. The LA Times explained how these homeowners can now “blend the taxable value of their old house with the purchase price of a new, more expensive home, reducing the property tax payment they’d otherwise face.” They could use this tax break three times, up from just once.

The primary benefit of this comes from the more than 40 year old provision that “limits property taxes to 1% of a home’s taxable value, based on the year the house was purchased.” The homeowners can now retain the tax advantages of their old homes when purchasing new, more expensive homes.

Proposition 19 was bad news for heirs who inherit properties they intend to rent out, however. They will not be able to maintain their parents’ low property tax payments and will instead pay based on current market value.

Aside from recent changes in tax law, there are some more commonly known tradeoffs between renting and buying. Renters prefer a more flexible lifestyle or are often required to move for their work. Buyers are willing to commit to a certain area for a long period of time.

Renters want to find a perfect home pre-designed for their tastes, while buyers are more eager to fully customize their homes and add their own improvements.

Renters risk unexpected rent hikes from their landlords, while buyers risk market downturns and the possibility of going underwater financially on their investments.

Renters forgo the potential for appreciation while buyers are willing to pay large upfront costs for a potential gain.

All in all, your decision to rent or buy will depend on your long term plans, desire for stability, preference for customization, and thoughts on investment potential. Consult your tax professional or financial advisor for expert advice on your personal situation and preferences.

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