There are lots of reasons to buy a home: the pride of ownership, the freedom of owning your own lodging, and the comfort of moving out of a cramped apartment, to name but a few. But is home ownership a good investment?

To begin with, homes have historically increased in value, creating perhaps the most common source of capital gains. According to the U.S. Census Bureau, median home values adjusted for inflation nearly quadrupled from 1940 through 2000. The demand for housing has never been greater, especially with the rapid population growth of the last half-century. That demand had fueled uninterrupted growth in real estate prices until mid-2006. Then, past easy lending and other factors created what has become known as the housing or real-estate "bubble."

The extent of a fall in prices is dependent upon the region, the state of the national as well as local economy, and the sector of the market one looks at (i.e., low-end, middle, or high-end). In any environment, people should be wary that past growth is no guarantee of future growth. Yet it remains true that a home built for $15,000 in the 1960s can easily be worth more than $100,000 today. Since houses are built on land, it may still be wise to remember the old saying, "They're not making any more of it." Everyone needs a place to live, so that fact bodes well for future real estate price appreciation, even if the go-go days of the 1990s never return.

Moreover, even in a down market, your wealth increases each time you make a monthly mortgage payment. Although the interest belongs to the institution that made the loan, the principal portion of the payment belongs to you, and it accumulates—like a savings account—over time. The current market value of the property, minus what you owe on the property to the bank, credit union, or mortgage company, is commonly referred to as your home equity. In other words, it's the portion of the property you actually own, free and clear.

But even what you owe on a house has its advantages. The biggest advantage is the mortgage-interest deduction. Basically, you can deduct the interest paid on any loan secured by your home (or second home). These loans can be the mortgage to purchase the house, or a loan or line of credit borrowed against your home equity. You can deduct up to $1 million in interest, or $500,000 if you're married and file separately. The interest deduction limit for home equity loans is $100,000 ($50,000 if you are married and file separately).

See IRS Publication 936 for more information.

You can also deduct the property taxes you pay. And when your family decides to sell the house, the first $500,000 in capital gains ($250,000 for single taxpayers) is yours tax-free. You can use this exclusion only once every two years, however.