April is almost here. That means everyone’s favorite season is upon us… tax season!
With the recent passage of the Tax Cuts and Jobs Act in December, three significant changes were included that will impact the average tax payer’s 2018 real estate decisions.
Although the tax bill had significant changes, three areas in particular will directly impact the real estate sector. The three changes to take note of are:
- The bill doubled the standard deduction to $12K for single filers and $24K for married couples. This is a significant increase from $6,350 for single filers and $12,700 for married couples in 2017.
- The mortgage interest deduction limit was lowered to $750,000 of debt on your primary residence. This change will mean now only 14% of American homeowners can benefit from the mortgage interest deduction. Loans taken out before the passage of the bill will be grandfathered in at the previous $1 Million cap.
- The bill institutes a $10,000 cap on deductions for state and local property taxes, income, and/or sales taxes. This $10,000 limit applies for both single and married filers. Nationwide, more than 4.1 Million Americans pay more than $10,000 in property taxes.
What are the predicted effects of these changes on homeowners?
Overall, the new tax bill is expected to lower the average American’s taxes. The Tax Foundation estimates that after-tax income for all taxpayers will increase by 1.1% over the long term. That’s not a huge increase, but the extra money could be saved for a downpayment, used to invest in home projects, or put towards paying down a mortgage.
In regards to real estate, the bill removes the tax advantages to homeownership. It is estimated that 90% of Americans will see little tax difference between renting and owning. Doubling the standard deduction means there will be little value in itemizing home expenses. In addition to removing the value of the mortgage interest deduction and property tax deductions, the bill decentivizes homeownership. Homeowners in the higher price point (or luxury market) will be hit the hardest from the mortgage interest and property deduction caps.
What are the predicted effects of these changes on the real estate market?
Before the final bill was passed, the National Association of Realtors estimated home prices would dip 10% across the board with some states seeing price dips as high as 21%. If home prices do dip, this could be good or bad depending on who you are. As a homeowner you want prices to continue to rise since a dip hurts your equity. For buyers who have been priced out of the market, this dip may be what thry need to finally afford a home.
The inventory crisis may also be worsened by the bill since the mortgage interest deduction grandfathers in homeowners who took their loan out before the new tax bill. If these homeowners do not sell, they will be able to continue to deduct up to a million in mortgage interest rather than the new $750,000 cap. The internet cap may discourage homeowners from “trading up” or buying larger homes.
Remember, none of the changes discussed will impact how you file your 2017 taxes. It is never too early to start thinking about the implications for your 2018 filing though. Consider talking to a tax professional now about how to make the most of (or limit the damage from) the new tax changes.
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