New Tax Law and How It Will Affect Real Estate

Will the new tax laws be good or bad for the real estate market?

Now that the new tax code has been signed-off on , a lot of people are asking how the Mortgage Interest Deduction is going to affect homeowners. Reactions range from “this is going to be a deathblow to the American Dream” to others saying this will have little impact on the majority of Americans.

Tax Changes

The new tax code allows taxpayers to deduct mortgage interest on loans up to only $750,000 combined for both primary and secondary (vacation) homes. The previous limit was $1 million. Existing homeowners will be allowed the previous deduction limit of $1,000,000 if the property was purchased prior to December 15, 2017.  Most homeowners will not be affected by the changes. The median home price in the United States is nowhere near $750,000. According to realtor.com data, the median list price nationally is $270,000. According to the Dayton Area Board of Realtors (DABR), of the 23,935 single-family homes that were sold in 2016 and 2017 in the Miami Valley (counties of Miami, Greene, Montgomery, Butler, and Hamilton), the average price was $158,109 and only 105 of the 23,935 listings were $700,000 and above.

The new tax code doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly.  As a result of this change, most taxpayers will take the standard deduction. According to the most recent information (2015), only about 30% of taxpayers currently itemize deductions with only 21.5% claiming the Mortgage Interest Deduction.  The new tax cut is only expected to affect about 1.3% of new mortgages. Wealthiest homeowners and those living in the most expensive parts of the county will most likely be affected.

The combined deduction for property, state, and local taxes has now been capped at $10,000. Some experts seem to think that the combination of the decrease in the property value that is allowed to be deducted and the increase in the standard deduction will cause fewer people to itemize, thus taking away a financial benefit to home ownership.  Other experts feel that fewer homeowners taking the Mortgage Interest Deduction may be a GOOD thing. They feel that the deduction, as it was previously allowed, caused housing prices to go up while encouraging buyers to borrow more money for bigger houses.

Will I Be Affected?

Those who will be most affected by the changes to the deduction are the residents of cities and states where housing costs AND taxes are high.  Washington, DC, California, Hawaii, Massachusetts, and New York will be the most-affected . These are the states that have the highest percentages of mortgages worth $750,000 and up.  The combination of the $10,000 cap on the deduction for property and income/sales tax and the decrease in the amount of the property value that can be deducted will leave some homeowners paying more out-of-pocket at tax time.  It can also be argued that tourist/vacation destinations will also be impacted. A homeowner who has a mortgage on a vacation home will be impacted if their combined amount of mortgages (primary residence plus vacation home) is over $750,000.

https://www.irs.gov/newsroom/resources-for-tax-law-changes