07 Feb 2018
February 7, 2018

How the New Tax Law Affects Housing

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The housing industry, homeowners and renters are trying to figure out how the Tax Cuts and Jobs Act will affect homeownership. Here are some head-scratching issues.

Mortgage interest deduction

For many homeowners, the mortgage interest deduction was their biggest tax break. Unfortunately for them, the new tax law lowers the cap on this deduction.

In the past, the cap was $1 million in mortgage debt, and another $100,000 in home equity debt. Now, homeowners can deduct interest on a mortgage up to only $750,000; the home equity loan interest deduction was wiped out altogether. However, the $1 million amount has been grandfathered in for those who bought homes until Dec. 15, 2017.

The median price of a U.S. home is a little more than $200,000, so lowering the cap won’t affect most homeowners. But under the old tax law, 44 percent of U.S. homes are worth enough to make it sensible for a homeowner to take advantage of the mortgage interest rate deduction, said Zillow; under the new law, that proportion drops to 14.4 percent.

How this affects housing: Predictions say the new law will hurt people living in high-priced homes. Not only might their tax burdens be higher, but people thinking about buying those homes will have less incentive to pony up for a more expensive home. Everyone is in a wait-and-see mode — to see how the new rules affect the desirability of homes and whether the law will change home prices.

In a related issue that has real estate agents worried, the new law raises the standard deduction substantially, meaning many who itemized will no longer have a reason to — and a range of deductions becomes meaningless to them. These people no longer have a tax-related reason to buy a home.

State and local tax deductions

Under the old tax code, homeowners were generally allowed to deduct all property taxes paid to state and local governments, if they didn’t pay an alternative minimum tax.

No more.

The new tax bill limits the deduction for all SALT, which include state and local income and sales taxes, to $10,000 for married couples and singles. If you live in a high-tax state like New York, New Jersey or California, that deduction reduction is going to hurt.

How this affects housing: If you itemize deductions on your annual federal tax form, homeownership looks less attractive and becomes more expensive if you can’t deduct all SALT, especially if you own an expensive home. Renting may start looking better and better.

Bottom line

It all comes down to why people buy homes. Because homeownership is part of the American dream? A rite of passage into adulthood? A way to live in more bedrooms and a better school district? Or a big, fat tax deduction?

Buy or selling a home is an emotional, as well as financial, decision. And the feeling that homeownership isn’t the tax break it once was could lead to fewer sales and lower prices on some levels, and less inventory and higher prices on others.

Not sure how the new tax law affects the price of a home you own or someday hope to buy? Give us a call, and we’ll help you figure out how the Tax Cuts and Jobs Act affects which housing option is right for you.