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How Homeownership Can Help Build Generational Wealth

By Walecia Konrad · May 18, 2022 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How Homeownership Can Help Build Generational Wealth

One of the tried and true ways to build wealth and financial stability is by buying real estate, which appreciates over the long term and may provide cash flow.

Owning your own home not only affords you a place where you enjoy living, but it will likely turn out to be a good investment, one that can help build generational wealth in your family.

What Is Considered Generational Wealth?

Generational wealth refers to assets passed on from one generation to another within the same family. Assets is a broad term that includes cash; stocks, bonds and other securities; a family business; and real estate, including the family home.

Because of the high rates of appreciation in the past several decades, real estate can be one of the most valuable assets passed down from one generation to another.

How Does Homeownership Build Wealth?

Homeownership can help build wealth directly through price appreciation. When the value of a home rises, owners are able to sell for that higher price, sometimes moving into a new, larger home. For homeowners who aren’t selling, price appreciation adds to their home equity and overall financial assets.

Of course, if home values decline, as they did in the 2007-2009 Great Recession, the opposite can happen and owners may find they owe more than the home is worth. But real estate has proved to be one of the most reliable assets in the long term.

The bottom line: A person’s home is often their largest financial asset, the benefits of which are often passed on to the next generation.

Good to know if you’re just getting started: A first-time homebuyer can be anyone who has not owned a principal residence in the past three years, some single parents, and others.

Recommended: First-Time Homebuyers Guide

Direct and Indirect Building of Wealth

Inheritance

Inheriting appreciated capital assets like real estate, stocks, bonds, ETFs, cryptocurrency, or a small business has a big tax benefit, thanks to the “step-up in basis.” The value of the inherited asset is “stepped up” to the fair market value on the date the original owner dies.

If the heir sells the property, the step-up in basis will greatly reduce capital gains taxes due or make them moot if there is no gain. Any capital gain from the sale of inherited property is considered long-term. Current long-term capital gains taxes are 0%, 15%, or 20%, depending on your income and filing status.

For married couples, the death of one spouse results in a partial step-up in most states, but here’s a simplified example. Let’s say you inherit your grandmother’s home, purchased in 1940 for $10,000. The home is valued at $450,000 on the date of her death, which is the stepped-up basis. If you sell the home for $450,000, you’ll pay no capital gains tax. If you sell for a higher sum, capital gains tax will apply only to the amount over $450,000.

Imagine using the stepped-up basis provision over more than one generation of a family. An heir could sell a phenomenally appreciated asset and pay a minimal amount in capital gains tax or none at all, as long as the asset was included in the decedent’s estate.

Recommended: What to Do With Inherited Money

Indirect Benefits

Heirs of homeowners may well inherit the actual real estate, but generational wealth can also be more indirect. Homeowners are often more financially secure than renters, passing that security on to children.

Homeowners are able to borrow against the equity to improve the home (and often boost its value) or take care of other financial needs.

In addition, many homeowners are located in districts with high-performing schools, enhancing overall opportunities for their children.

Down the line, the equity in a home can help finance retirement and health care needs, shielding adult children from that financial burden. All of these factors can positively affect the next generation and add to their wealth.

How Discrimination Can Affect Generational Wealth

When housing discrimination occurs, it can keep people of color, women, and families with children, immigrants, and people with disabilities from living in the place they want. Importantly, it can also have a serious impact on generational wealth.

Considering the following census statistics from the fourth quarter of 2021:

The homeownership rate for non-Hispanic white households overwhelmingly led the pack, at 74.4%. Asian, Native Hawaiian, and Pacific Islander families came a distant second, at 61.2%. Hispanic families of any race had only a 48.4% homeownership rate, and African American households logged in at 43.1%, the same rate as in 1970.

A number of factors have contributed to the race gap in homeownership; not the least is the legacy of race-based discrimination in the housing market.

When homeownership lags among a certain group because of housing discrimination, so does the possibility for generational wealth.

Understanding Home Appreciation and Home Equity

To understand how homeownership can build wealth, it’s important to understand the concepts of home appreciation rates and home equity. The increase in the value of a home over time is known as appreciation or the appreciation rate.

Home equity is the property value minus the outstanding balance of mortgages, liens, or other debt on the property.

Your first contribution to home equity is your down payment.

In addition, every time you make a monthly mortgage payment, you are paying down the amount you owe and slowly paying part of the principal on your loan, which builds equity. Price appreciation and home improvements can also add to home equity.

Most people purchase real estate with the expectation that their home will increase in value over time. But many things come into play when it comes to home appreciation and the amount of home equity you can build. Some you can control and some you can’t. Let’s take a closer look.

Recommended: How Much Is a Down Payment on a House?

The Economy

Housing prices can be affected by several economic indicators. When a recession hits, unemployment rises, or inflation jumps, the real estate market often declines.

Interest rates are also vitally important. Low mortgage interest rates can fuel demand, which can increase home prices in many areas. Conversely, a rise in mortgage rates can have a cooling effect on buyer demand.

The correlation between the housing markets and the rest of the economy can be surprising at times. During the initial stages of the pandemic, when economic indicators were showing signs of trouble, the nation saw a giant rise in home prices. This was particularly true in rural and suburban areas as urban dwellers sought more room and fewer crowds.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Laws and Regulations

Federal legislation can have a big effect on the U.S. housing market. Government tax credits, deductions, and subsidies aimed at certain homeowners can fuel the housing markets.

Local policies and regulations can also affect housing appreciation. Local investments in infrastructure or new schools and parks can increase your home’s value. Local zoning laws can also have an effect, positive or negative.

Home Improvements

This encompasses everything from an extensive addition to a fresh coat of paint. All kinds of improvements can add to the resale value of your home and, importantly, enhance your life while you’re living there.

Whether you decide to remodel a kitchen, a bathroom, or a remodel a living room, updated appliances and décor and energy-efficient improvements are often valuable upgrades.

To fund them, some homeowners use home improvement loans.

Is Homeownership a Smart Investment?

The answer to that question isn’t always straightforward. First, your home is the place where you live, of course, and hopefully you derive happiness from that. In that sense, the costs associated with your home and your mortgage payment can be considered living expenses, not necessarily an investment.

On the other hand, appreciation and home equity can be seen as the return on your investment in your home.

The sweet spot is often a combination of the two: a lovely place to live and a profitable investment.

Still, homeowners’ net worth far outpaces renters’. Every three years, the Federal Reserve issues the Survey of Consumer Finances, which compares the net worth of homeowners and renters. The latest report shows that homeowners had a median net worth of $255,000; renters, $6,300.

Keeping your expectations realistic can effectively put your home value into the context of your overall financial wellness and estate planning. To do that, you may need to keep in mind the total costs of owning and maintaining real estate. Too often people subtract their purchase price from the expected sale price and figure the difference is the return on investment. But there are many more costs involved in homeownership.

To calculate your true return, you’ll want to add up your down payment, closing costs, mortgage points, any mortgage insurance, maintenance, improvements, total mortgage payments, taxes, any homeowners association fees, and estimated selling costs. That total is the number you want to compare against home appreciation to determine your actual return.

The Takeaway

How does homeownership build generational wealth? In direct and indirect ways. Buying real estate can build a foundation for a family for a generation and beyond.

If you’re a first-time homebuyer, SoFi may allow a down payment as low as 3%. Others may put 5% down.

SoFi offers a range of fixed-rate mortgages that can help you unlock the door to homeownership and build a legacy.

SoFi also finances second homes and investment properties.

Find your rate today.


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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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