The decision to rent or own a home is not just about having a place to live; it also has significant implications for your financial future. One key aspect that often comes into play is net worth … the value of your assets minus your liabilities. Numerous studies and statistics highlight a compelling trend: homeowners tend to have higher net worth compared to renters.

The numbers according to the Federal Reserve’s Survey of Consumer Finances confirms the belief that homeownership has long been associated with wealth accumulation. The median net worth of homeowners is 40 times higher than that of renters. This discrepancy can be attributed to several factors that favor homeowners, including equity buildup, property appreciation, and forced savings through mortgage payments.

Homeownership allows individuals to build equity over time, which is the difference between the home’s market value and the remaining mortgage balance. Every mortgage payment with amortizing loans contributes to this equity, leading to a gradual increase in homeowners’ net worth. On the contrary, renters do not benefit from this form of forced savings, as their monthly rent does not result in any ownership stake.

Historically, real estate has proven to be a valuable investment, with properties appreciating in value over the long term. Homeowners enjoy the potential for capital appreciation, which can significantly boost their net worth. In contrast, renters do not participate in the appreciation of the property they live in and miss out on this wealth-building opportunity.

Homeownership also comes with tax benefits, such as deductions for mortgage interest and property taxes but with such a high portion of taxpayers electing to take the standard deduction, the more important tax benefit is the capital gains exclusion.

Homeowners can exclude up to $250,000 of the gain on their principal residence if single and up

to $500,000 if married filing jointly. During the five-year period ending on the date of the sale, the

taxpayer must have owned and lived in the home for at least two of the past five years.

These advantages contribute to lowering the overall cost of homeownership and increasing the financial cushion for homeowners.

Owning a home can have positive implications for retirement readiness. As homeowners pay down their mortgages, they are essentially building a valuable asset that can be leveraged in retirement. Borrowing against one’s home is not a taxable event. The proceeds could be used for any reason. Furthermore, owning a home outright eliminates the need for monthly rent payments during retirement, providing greater financial security.

Additional sources to support the claim that homeownership has net worth advantages include:

• The National Association of Realtors regularly releases reports that analyze the financial benefits of homeownership, including equity accumulation and property appreciation.
• The Case-Shiller Home Price Index tracks changes in the value of residential real estate, offering insights into property appreciation trends over time.
• U.S. Census Bureau data offers a broader perspective on homeownership rates, wealth distribution, and their impact on net worth.

The numbers speak for themselves … homeowners tend to enjoy a higher net worth compared to renters. The combination of equity building, property appreciation, tax advantages, and retirement preparedness contribute to this financial advantage. While individual circumstances vary, it’s clear that homeownership offers a pathway to building wealth and securing a more robust financial future.

For more information, download our Homeowners Tax Guide.

Ken & Barbie have been married 20 years and have owned their current home for over 10 years. Without the benefit of legal or tax advice, they decide to divorce with Ken taking his retirement and Barbie taking the equity in the home which are equal in value.

It appears to be equitable until a year later when Barbie decides to sell the home. It sells for the same market value at the time of the divorce but now Barbie pays all the sales costs. The unpaid balance on the home was much larger than normal because it had been refinanced for $750,000 two years earlier.

When Ken gave Barbie his equity in the house, he also gave her his tax liability in the home. Barbie has a substantial capital gain because the home was purchased for a much lower price ten years earlier. Capital gain is calculated by taking the sales price less sales costs, plus capital improvements made, less the purchase price.

Since she is single, she has a $250,000 exclusion and the balance of the gain of $456,750 will be taxable as long-term capital gains. Let’s assume her rate is 15%, Barbie would owe $68,513 in capital gains taxes.

When calculating Barbie’s net proceeds from this sale and accounting for the sales costs, mortgage balance, and federal taxes due, she only realizes $88,487 in this example while Ken walked away from the divorce with the full value of his retirement account of $225,000.

It doesn’t appear to have been an equitable settlement. Contributing to this inequity was an apparent misunderstanding of how taxes are calculated and that the expenses incurred with the sale of the home as a single person would be borne solely by herself.

No gain or loss is recognizable on the transfer of the residence if related to the end of a marriage. It is treated as a gift with no gift tax due if the transfer is within two years prior to the divorce or one year following. There is no change in basis; it is carried over to the gifted party.

A marriage is a legal arrangement and divorcing deserves the benefit of expert advice. An attorney who is familiar with potential tax consequences could have advised his/her client about the potential tax consequences and possibly suggested a more equitable division of assets.

This example is used to show you how it can appear to be an easy solution to dividing the assets. In an emotional state, one person could agree to something that could be costly later.