The In-House ATM
Imagine having an ATM in the comfort of your own home, ready to dispense cash whenever you need it? While this may sound like a financial fantasy, the reality is that your home can serve as a valuable source of equity when you require extra funds. Many homeowners regularly leverage their property to access cash for a variety of purposes. In this blog post, we will explore some compelling reasons why building equity in your home holds significant value from a tax perspective.
1. As a home's value increases, that value is not being taxed. Upon sale, singles get a $250,000 capital gains exemption, and couples receive a $500,000 exemption – a substantial avenue for tax-free wealth growth.
2. Homeowners who move out and turn their home into a rental property for at least a year or more, can execute a 1031 exchange without paying any capital gains taxes if the replacement property is priced at an equal amount or more.
3. Wealthier home buyers, affected by SALT deduction limits, often buy properties in all cash and then draw out cash via financing for investment purposes. All the interest on borrowed funds is tax-deductible. Not just the interest on the $750,000 maximum or the smaller real estate tax deduction.
4. In the event you need cash quickly, leveraging your home's equity via a loan can be cheaper than liquidating an investment that is subject to capital gains taxes. Despite higher interest rates, it is still cheaper than capital gains taxes, especially if the assets you would have had to liquidate were owned for a short period of time, as short-term capital gains taxes are higher. As an added bonus, HELOC's are usually tax deductible.
If you're contemplating the option of renting, it might be worthwhile to reconsider. Owning a home offers numerous advantages, including the potential to have an "in-house ATM" and build wealth over time.