Q. We are at the stage of life where we are ready to sell our house and move to an apartment. The question is whether to rent or buy. Of course, with location being important, we may have to look around a lot more if we decide to rent. Please let us have your thoughts on this important question.
A. To buy or rent: that indeed is a big, important question for many.
A year ago, I would not have hesitated one minute because, in my opinion, ownership is clearly the preferred choice. However, with Congress engaged in potentially significant tax reform, the question becomes more difficult for many consumers.
We buy a home for many reasons. One important consideration is potential appreciation of our home, compared with living in a rented property. Many people have made a considerable amount of money from ownership of their own home.
Another reason for homeownership traditionally has been the tax benefits that are available. Without going into all of those benefits in this column, it should be noted that the major ones have been the ability to deduct mortgage interest payments and real estate taxes and the ability to "roll over" the profit from the sale of your old house under certain circumstances.
And, indeed, when you reach the age of 55, you are entitled to a once-in-a-lifetime exemption of up to $125,000 of any profit in your house. Thus, Congress has continued to foster the great American dream, namely, to own your own home.
And a third consideration for homeownership has always been convenience. By owning your own home, you are your own landlord. You can decide, in most cases, whether to paint or not. You can decide when to add an addition and how big it will be. You also are relatively free of outside interference such as conversion to condominiums and evictions.
While the appreciation and the convenience factors are still valid, the current proposals for tax reform in some instances water down the tax benefits of homeownership. While it is true that Congress will preserve all of the homeownership tax benefits, the fact remains that if a tax bill is enacted, it will significantly reduce the amount of overall income tax that citizens will have to pay. If, for example, you are currently in a 40 percent tax bracket, you may only be in a 27 percent tax bracket if the Senate tax version passes. Thus, while you still will receive homeownership tax benefits, they will be somewhat watered down because you may not have to pay as much income tax.
Now let's try to respond to the specific question. If you are young, and believe that you have a long-range income potential, then clearly, in my opinion, homeownership is still more beneficial than renting. However, if you are retiring, and your income will decrease significantly, then maybe homeownership will not be as advantageous, and renting may better fit your needs.
However, this opinion is based exclusively on one of the three-pronged benefits of homeownership -- namely, the tax benefits. From an appreciation point of view and from a convenience point of view, I still believe that homeownership is preferable to renting.
It should also be pointed out that if the tax bill is enacted, most of the experts are predicting that residential rents will begin to move upward considerably. People will be buying real estate for economic reasons -- and not tax reasons. Thus, in order to make a good economic investment, rents will have to be significantly higher.
Obviously, this means that if you rent rather than buy, the convenience element may be sacrificed, in that you may find yourself subject to significant annual rent increases. Even in the District of Columbia, where rent control is in effect, we may begin to see a significant increase in the use of the hardship petition -- a procedure authorized by the City Council to assist landlords in obtaining an economic rate of return on their investment.
And, it also must be noted that if you will continue to have an income after your retirement, then clearly, homeownership will continue to make sense. Congress will continue to preserve the tax benefits of homeownership, and, indeed, it even looks like the second-home tax break will be protected.
No one knows for certain whether a significant tax reform bill will be enacted this year -- although Congress is clearly responding to what appears to be momentum for tax reform. There are those who predict that if such a tax-reform bill is enacted, interest rates will go down even further because consumers will have more dollars to spend.
Other forecasters are predicting that if the tax bill is enacted, real estate prices will decline -- at least on an interim basis. Thus, it might be wise for you to sit tight and await the outcome of the congressional debates on the tax reform measures. Within the next few months, we all should have a better sense of what Congress will and will not do in the area of real estate tax reform. Waiting a few more months should not, in my opinion, significantly affect your decisions. But waiting will give you the opportunity to keep all of your options open.