WHY YOU SHOULD OWN YOUR HOME

By:  Roman P. Mosqueda, Esq.

            The single best investment in your lifetime is owning your home, no matter how humble or palatial it is.

            Forget about the pride of ownership.  Think about owning a home with little or no down payment.  Think about the appreciation in value.  Think about the tax deductions.  Think about the inheritance to your children.

            If you already own your home, think about upgrading your home, or moving up to a more expensive home, or buying an income-earning property.

            A client, who is a Hispanic janitor (euphemistically called maintenance man), employed by the Palos Verdes School District, has managed to own his home and buy a duplex that he rents to two tenants to pay his monthly amortizations.

Leverage Buying

Of A Home:

            Purchasing a home is leverage buying.  With good credit, you may obtain an 80 or 90 or even 100 percent loan from a direct lender or mortgage broker, or convince the seller to carry a second note and deed of trust on the property.

            So, with 20 percent or less or no down payment, you may be able to buy your home, avoid paying rent that is not tax deductible, deduct some interest payments and uninsured casualty losses and property taxes, and enjoy the pride of ownership.

            The younger you are when you own your home, the more time you have to take advantage of leverage buying, tax deductions and value appreciation of your home.

            Moreover, the law of supply and demand assures the appreciation of values of homes.  You could have bought the same home cheaper last year.  And you would have made money on a home after one year.  You cannot afford to wait any longer.

            There are creative and innovative ways of financing the purchase of a home by a family of two-earners in California.

            Lenders use a debt-income ratio for loan qualification, and a loan-to-value ratio for the amount of the loan.

Appreciation In

Value Of Homes:

            Aside from leverage buying, that is, owning a home with little or no down payment, a homeowner makes money from the appreciation or increase in value of the home translated into increased equity.

            Equity on a home is fair market value less outstanding balance on the home loan(s).  It is the net market value of a home.  It is like money in a bank, only that it increases in value higher than a bank deposit.

            Equity can be used to borrow money, as in an equity loan. It represents an almost liquid asset.  Notice how banks advertise equity loans without closing costs.

            Statistics from the California Association of Realtors, of which the Author is a member, shows that median homes ($465,540 as of September 2004 ) in Los Angeles County have appreciated by 21 percent from 2003.

            Nationwide statistics from the National Association of Realtors, of which the Author is also a member, shows that median homes ($186,000 as of September 2004,  $171,800 as of September 2003) in the United States have appreciated by 8.6 percent from 2003.

Tax Deductions From

Home Ownership:

            Pursuant to a promissory note secured by a deed of trust in favor of a lender(s), monthly mortgage payments (on principal of loan and/or interest) are paid by the homeowner-borrower to the lender(s).

            Unlike rentals, some interest payments and points charged on a loan are  deductible from gross income in the homeowner’s federal and state income tax returns. But maintenance expenses and depreciation are not allowed to be deducted.

            For an owner of an income-earning property, costs of capital improvements, such as replacement of air conditioning or heating system or adding a gate or patio, are added to the cost basis and depreciated.

            Residential, rental property acquired after December 31, 1986 can be depreciated over a 27-1/2 year period, by using the straight line method of depreciation.

            Capital gain from the sale or exchange of a principal residence on or after May 7, 1977, up to $250,000 or $500,000 (if married and filing jointly), is not taxable at all.

For investment properties, a 1031 exchange provides one of the best shelters for deferring capital gain tax by reinvesting the proceeds from one property to another like-kind property without recognizing any gain.

Property Tax For

Principal Residence:

            California’s Proposition 13 caps the increase in property tax assessments at 2 percent annually.  Thus, it insulates existing homeowners from tax hikes on their now more valuable homes.

            The local County Tax Assessor assesses the value of each property, thereby determining the property tax to be paid by the owner.

            A property owner can dispute the assessment by filing an appeal with the Assessment Appeals Board.

            The property tax rate is limited to $1 per $100 assessed value, or 1 percent of fair market value.  And the property tax is determined by multiplying the total of the assessed values of the land and improvement of the property by the tax rate.

            A property is re-assessed every time it is sold, often resulting in a supplemental tax bill to be paid by the new owner.

            Property tax payment is due on November 1 and becomes delinquent on December 10, for the first installment of the tax bill. And the second installment is due on February 1 and becomes delinquent on April 10.

            If property taxes are not paid, the property is sold to the state.  And the owner can redeem the property during the next five years, and if redeemed, receives a redemption certificate.

            After five years, the County Tax Collector can sell the property, after publication of a notice, copy mailed to the tax delinquent owner.  A buyer at the tax sale receives a tax deed.

Documentary Transfer Tax:

            When a homeowner sells his or her property, the County levies a tax on the transfer of the property.

            This documentary transfer tax is based on the purchase price of the property less the balance of any existing assumed loan.  The rate is $.55 for each $500 of consideration for the transfer of the property.

            The County collects the documentary tax at the time the grant or gift deed is recorded in the County Recorder’s Office.

            This transfer tax is usually considered part of escrow closing costs that may be equally divided between the seller(s) and the buyer(s).

            All things considered, the faster you own your home, whether a condominium, townhouse, mobile home or regular house, the more benefits of property appreciation and tax breaks you can have.

            Oftentimes, the most valuable asset you can leave your children as their inheritance is your appreciated home.

            (The Author, Roman P. Mosqueda, has been a real estate Broker in New York and in California (since 1999), and is the principal of the Mosqueda Realty, Inc. and its subsidiary, Mosqueda Mortgage Company.  He is also a real estate attorney.)