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The Impact of the New Tax Bill on Your Housing Costs

Mar 04, 2018 | Peter Christensen |

The Impact of the New Tax Bill on Your Housing Costs

President Trump signed the new tax bill—the Tax Cuts and Jobs Act—into law at the end of 2017, following months of fights between Republicans and Democrats (and among Republicans themselves). Now that the drama is over, it’s time to figure out exactly what the new legislation means.

The tax bill and your housing costs

Let’s just jump right into it. As a homeowner, your net after-tax housing costs are going to increase, which may make renting more appealing to more people. But it’s not as simple as that: the impact of the new tax bill on you depends on your location, your budget, and whether the tax bill increases or decreases your total tax burden. Below is a summary of the provisions that may impact your home and your local housing market.

The mortgage interest deduction

The interest deduction changes, so that only mortgages up to $750,000 qualify, compared to up to $1,000,000 before the tax bill. The change affects mortgages taken out after December 14, 2017. Note that you’ll be able to deduct interest on debt up to $1,000,000 on mortgages taken out on or before December 14, 2017, even if you decide to refinance.

The new tax bill removes the deduction for home equity debt for home improvements, including on existing loans, but you can still claim it for 2017. If no new legislation is introduced by 2026, the provisions will revert to their previous state.

For the majority of homeowners out there, this change will have no effect—most homes are worth less than $750,000. However, homeowners in expensive areas, such as along the coasts, may be hurt by increasing housing costs. The law also discriminates between current and future homeowners—people living in million-dollar houses will have less incentive to move, while people who consider to trade up may want to reconsider. The results will likely be an even lower supply of less-expensive homes.

State and local tax deductions

If you didn’t pay the alternative minimum tax, all property taxes paid to state and local governments could be claimed as an itemized deduction under the old law. You could also deduct state and local income or sales taxes. Under the new law, these taxes are bundled together and are limited to $10,000 in total, whether you’re an individual or a married couple. This is termed the SALT deduction.

If you’re living in a high-tax area, the $10,000 probably won’t come even close to covering your property and income tax bills. Many homeowners rushed to prepay their property taxes for 2018 to allow these to be deducted on their 2017 taxes. However, the IRS has released a statement that only 2018 taxes that had been assessed already would be eligible for prepayment.

Recently, the California State Senate introduced legislation that would allow residents to make charitable contributions to the state instead of tax payments. It’s unclear if this will be legal, but it’s just one example of state governments looking for creative solutions for their residents.

The overall outlook

Your after-tax housing costs may not remain at their current levels, even if the above changes don’t affect you directly. Under the new tax bill, your standard deduction is now double to $12,000 ($24,000 for married couples filing jointly). This may cancel out the benefit of itemizing your deductions because your mortgage interest deduction and SALT deduction might not exceed $24,000.

According to an analysis by Zillow, only 14% of US homes are worth enough and carry tax bills high enough that a new buyer who borrows 80% of the purchase price would see any benefits from itemizing their deductions. This is a huge drop from the 44% under the old legislation.

The real estate industry is shaken

The new tax bill eliminates the incentive to buy a home, which—no surprise—will have a huge impact on the residential real estate industry. Perhaps homeownership has been over glorified, and we could even see lower home prices because of the reduced tax benefits, allowing first-time home buyers to get their foot inside the door.

However, the situation could have been much worse—earlier versions of the tax bill reduced the benefits even further. And one advantage for homeowners of the new bill is that it maintains the exclusion of capital gains from the sale of primary residences: If you sell a home that you have owned and used as your primary residence for at least two out of the past five years, you may exclude up to $250,000 of gains from taxation ($500,000 for couples filing jointly). Earlier version of the bill saw the requirement increased to five out of eight years and kept higher-income taxpayers from claiming the deduction at all.

If any of this may affect you, consult your tax advisor before making any decision relating to buying or selling a home.