What are the benefits of buying a house?

Homeownership is often thought of as an enduring part of the American dream, not to mention the American way of life. Better than six out of ten American households own the roof over their heads, and three of the other four aspire to own it. Homeownership is considered a sign of maturity, stability and financial independence. It can even be the path to some profit.

There are a few compelling reasons to own your home. It may not be fair to renters, but the tax laws favor homeowners—no question about it. If you rent, you pay the owner’s mortgage interest and property taxes as part of your rent, but only the owner gets to deduct them from taxable income. Fortunately, you don’t have to be a landlord to claim these write-offs. All you have to do is own the place.

In the early years of a home mortgage, nearly all of your monthly payments go toward fully deductible interest. Take a conventional, 30-year, $100,000 mortgage at a fixed rate of 8%. Each year interest and principal payments total $8,805. In the first year $7,970 of that amount—more than 90% of it—is deductible as interest. Even in the 15th year, about 70% of your monthly payments would be deductible.

Interest on up to $1 million of mortgage debt is fully deductible. What this is worth to you depends on your tax bracket. Let’s say you’re in the 27% federal tax bracket, for example. That’s an income between about $27,050 and $65,550 if you’re single, or about $45,200 and $109,250 if you file a joint return. In the 27% bracket, $1,000 in deductions saves you $270 in taxes. In other words, for each $1,000 of housing payments consisting of interest and property taxes, Uncle Sam pays $270 by reducing your federal income-tax bill by that amount. You save some on top of that by taking the same deductions on your state income-tax return.

When you sell the place, you can make a profit of up to $250,000 ($500,000 for a couple) without owing a dime of tax. There is absolutely no other way to make that kind of money and legally get to keep it all.

Homeowners can also use the equity in their home as a source of tax-sheltered loans. You can borrow against your home—through either a second mortgage or a home-equity line of credit—and deduct all the interest you pay on up to $100,000 of such loans, regardless of how you use the money.

Most people buy a home with a little of their own money and a lot of somebody else’s. This use of borrowed money means you can profit from price increases on property you haven’t paid for yet. That’s the “leverage” everybody talks about. The bigger your loan as a proportion of the home’s value, the greater your leverage. Say you buy a home for $100,000 with no mortgage and sell it three years later for $110,000. The $10,000 gain represents a 10% return on your $100,000 outlay after three years. That’s okay, but not great.

Now look at the deal another way: Make a down payment of $20,000 and get a mortgage for the rest. You still make the $10,000 profit, but you’ve invested only $20,000 to get it. Your return: a spectacular 50% (ignoring for the sake of simplicity the cost of the loan, tax angles, commissions and other costs).

People aren’t worried much about inflation these days, but what if it were to heat up? What would happen to home prices? Well, let’s look to the past for a clue. In the high-inflation period from the mid 1970s to the early 1980s, the cost of living rose about 70%. Home prices doubled in the same period. Since then, in a time of generally tame inflation, home values in general have risen a little faster than the inflation rate, providing at least some profit potential in most parts of the country. If inflation soars again, homeowners should be well protected against its damage.