What the New Tax Bill Means for Homeowners
The Mortgage Interest Deduction Cap is Lower
Mortgage interest will still be deductible, but on mortgages of up to $750,000 rather than the current top limit of $1 million. This applies to new mortgages only. For current mortgages, as well as refinances not larger than the original mortgage, the old limits still apply.
What It Means: Prospective sellers in areas with high property values may choose to stay put rather than take out a new mortgage of over $750,000 for their next home. Buyers in high price ranges may adjust their top price point in order to compensate for the lost deduction.
Some People Will Have Limited Deductions for Property and State Taxes
Before the new bill, taxpayers were able to deduct an unlimited amount for state and local income, sales and property taxes (referred to as SALT). Now single and married taxpayers alike are subject to the same maximum deduction of $10,000.
What It Means: This is expected to affect coastal cities with high property values the most. According to Ed Kilgore of New York Magazine, in 2015 the average SALT deduction for Californians was $18,400, and over a third of California taxpayers took it. In New Jersey, owners of properties assessed at over $425,000 already pay over $10,000 per year in property taxes, in addition to paying state income and sales taxes.
Fewer People Will Choose to Itemize Deductions
Itemizing deductions will no longer make sense for many people because the new bill roughly doubles the standard deduction.
What It Means: The National Association of Realtors® believes this drop in itemization will decrease the appeal of the mortgage interest and property tax deductions.
The Home Sale Gain Exclusion Is Safe
This beloved tax break was in jeopardy for a while, but remained intact in the final version of the bill. As long as a home has been a primary residence for two of the five prior years, a single seller can still exclude from capital gains taxes up to $250,000 of gain (profit on the sale), and married couples filing jointly can exclude up to $500,000.
What It Means: Losing the exclusion would have created a strong incentive for current homeowners to postpone selling. Keeping the exclusion avoids the drop in inventory this would have created, and maintains a huge benefit of homeownership.
No Mortgage Interest Deduction for Home Equity Loans
2017 is the last year that homeowners will be able to deduct interest on home equity loans of up to $100,000,
even for pre-existing loans.
What It Means: This may affect remodeling plans for homeowners who wanted to use a home equity line to pay for renovations. It also changes options during the purchase process for buyers who planned to use a home equity loan to avoid paying private mortgage insurance when putting less than 20% down. (A common purchase scenario has been an 80% conventional loan, 10% home equity loan, and 10% down payment.)
The Big Picture:
Most real estate experts believe the new bill is likely to have some kind of dampening effect on the U.S. real estate market, although opinions differ as to the extent. Moody's Analytics predicted that by mid-2018 property prices would end up 4% lower nationwide than they would have been without the bill, but in reality this is likely to vary widely according to location.
Lower-value areas with low property taxes will probably be largely unaffected, while
high-value areas and/or those with high property, state, and sales tax rates - typically coastal and some Midwest cities - could see greater effects because the new law increases the cost of homeownership for more people in those locations.
Other Trends to Watch For:
The Suburbs Are Getting Hotter
Millennials priced out of in-city areas are reshaping the suburbs, according to Zillow chief economist Svenja Gudell. Expect amenity-rich, walkable neighborhoods in more affordable areas to experience increased demand.
Interest Rates Will Probably Go Up, But Slowly
Experts appear baffled as to why interest rates are still in the low 4-percent range, even after a .25% rate hike in December. Many financial gurus now expect them to reach from 4.5% to 5% by the end of 2018.
(A rate increase of .50 percent means a borrower pays around $30 more per month in principal and interest for every $100,000 of loan amount.)
Age-In-Place Features Are More Valuable than Ever
Wider hallways, grab-bars in bathrooms, and easily accessible mother-in-law living quarters are smart investments for homeowners preparing for the growing buyer demographic of seniors and multi-generational families.
The "Unicorns" in the Housing Market Are...
Homes priced at the first-time-buyer and mid-range levels, according to the Urban Land Institute. According to Gudell, there are 12% fewer homes for sale than a year ago, and 51% of those are in the top one-third of price tiers - which means that many buyers in lower price ranges are finding slim pickings.
** The new law will affect taxpayers in 2019 when they file for the 2018 tax year, not when they file for 2017. The information here is not meant to be taken as professional tax or financial advice. Please always consult a qualified professional.
