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Your CPU should be perfectly capable of that. I ran Proxmox with some VMs and containers on an i5-2400 with 16GB RAM just fine.
You could run on bare Debian as well but virtualization will give you more flexibility. If you get a Zigbee Dongle or the like, you can pass it through to the VM Home Assistant is running in.
I don't know MergeFS but usually the recommendation is ZFS.
would agree the hardware would run everything fine