Taxes: Your First/Best Investment

Here's an important question that everyone asks at one time or another: "Now that I'm starting to make money, what investment should I make first?" The answer may not be what you'd think.

Every libertarian, of course, knows enough to keep his money out of banks and other fixed-interest "savings" institutions, both because of easy government access and because of inflation wiping out any interest that may be paid. The alternatives—investments that have served so well to protect wealth in the midst of upheavals throughout history—are gold, silver, diamonds, coins, art, etc. And there is no gainsaying the absolute value of such investments. But none of them should be your first large-scale investment.

When a client asks me the above question, I always counsel this: buy a home—that is, a single-family dwelling house. In California, as well as many other areas of the country, homes that sold for a mere $20,000 or $30,000 ten years ago are now bringing in prices of $80,000 or $90,000…and more. The reason for this is that a home offers a solid basis of real-world value, even in the face of inflation, governmental harassment, and bureaucratic roadblocks.

That is to say, you can live in a house. It protects you from heat, cold, rain, and snow, as well as financial vicissitudes. You can raise a family of little antigovernment toddlers—future troops in the battle for liberty—in a house. And, unlike gold coins, silver, diamonds, or antiques, you can stockpile and protect things inside a family home, such as food and necessary weapons. It can even be used as a fortress to hold out against the ugly forces of statism, should the need arise. A home, privately owned, gives one solidity and contact with the earth. It affords a basis for inflamed passions against oppressors. No wonder that the first blow of the modern tax rebellion was struck over property taxes in California. No wonder that dictators—of whatever stripe—so often move to expropriate small landowners and homeowners.

But there are countervailing forces, particularly in America. At the same time that the different levels of government—from local to federal—move to depress the supply of housing with zoning, "safety" regulations, density controls, bureaucratic harassment, etc., we find powerful incentives to encourage home ownership. Measures abound such as FHA home loans, VA guaranteed mortgages, and Farmers' Home Loan Administration assistance.

Among the most compelling of such measures are the myriad tax breaks available to the homeowner. Unlike most "loopholes," the tax benefits of home ownership benefit the general, productive, working populace. And the little perks of home ownership keep growing. And, with the great mass of working people in America either owning or striving to buy their own home, it has become sure political suicide to suggest ending the benefits. With that happy thought in mind, here are a few of the tax reasons why your first investment should be a house:

1. All the interest you pay on your home mortgage is deductible on the Schedule A of your income tax return. With the standard deduction (new bureaucratic name: "zero bracket amount") being raised every few years, it takes a bigger and bigger chunk of money to "beat the standard" (which is currently $2,200 for single people, $3,200 for married couples filing jointly, and $1,600 for those who are married filing separately—and it's scheduled to increase yet again for 1979 returns). Usually home mortgage interest alone—10 percent and more throughout the country today—is enough to push one over the line into tax-saving deductible amounts on the Schedule A.

2. All state and local real estate (property) taxes are similarly deductible on the Schedule A. Although Proposition 13 and the tax rebellion have put a temporary dent in the vicious appetites of government functionaries for raising money in this way, it's not uncommon even today for a homeowner to have to pay a property tax "rent" of $100 or more per month.

3. If you buy a succession of "personal residences" (in the tax-law parlance), and each one costs as much or more than you sold the previous one for (with certain adjustments), then you pay no tax on any profit you made by selling the previous residence. Such taxes are not killed permanently, only deferred. But if you live in your own home all your life, the tax pigs aren't going to see a penny until you die. And even then you might be able to work something out…

4. Homes, being "capital goods," are taxed at the much more favorable capital gains rates. That is, if you sell a house and make a profit of $10,000 on it and choose not to invest in another house of equal or greater value, you'll have to pay income tax on only $4,000 of that profit.

5. There are generous one-time exclusion rules for certain people who sell their homes. If you are age 55 or older and have owned and lived in the house as your personal residence for three of the previous five years, then you can totally exclude (not simply defer) any tax on your profit up to $100,000.

6. If you rent out part of your home or use part of it for an office, depreciation deductions are available, as well as certain operating expenses for those parts of the home, such as utilities and a portion of your home insurance.

7. If you work on your home and improve it over the years with things such as landscaping, additional rooms, or a sprinkler system, the cost of such improvements is added on to the original cost of the house to you, which decreases the amount of profit you will be taxed on.

As you can see, the list of tax benefits is long. These remarks are only a broad outline, and you should see a good tax advisor before buying or selling a house, since the rules are detailed and complex. Nevertheless, they're real if you're a homeowner, and they help save you money that would otherwise go to our tormentors who work for the government.