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.