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Who Loses Under the New Tax Provisions? Homeowners

Realtors across the country are not happy about the tax code overhaul because the legislation reduces the tax advantage of owning a home, effectively making the “American Dream” tougher to achieve. For decades, our government has encouraged homeownership, as housing is considered one of the engines that drives our economy.

Changes to Deductions

Now, the new rules will likely reduce homeownership and prices. This impact will be particularly felt in those high-cost, high-income areas which have previously been receiving much of the tax benefit because one effect of the tax code code is to reduce deductible mortgage Interest. The new tax rules state that only interest on acquisition debt up to $750,000 will be deductible. Interest on home equity loans won’t be. The prior $1 million debt limit is retained for mortgages originated before December, 15, 2017. (For related reading, see: How the GOP Tax Bill Affects You.)

Under the new legislation taxpayers must add their state and local property taxes to their state income tax with the combination capped at a maximum $10,000 deduction. For example, if the taxpayers have $15,000 in state income taxes and pay $20,000 in property taxes, they can only deduct a total of $10,000. The remainder is lost. As you can see, taxpayers with higher incomes and expensive houses will be impacted most by these two provisions.

The third big change impacts the entire market. The standard deduction has been doubled. Previously, the standard deduction for a couple was $12,700. It’s now $24,000 ($12,000 for individuals).

An Example of the Impact

Here’s an example of the impact. A young couple wants to buy a house. Their combined income is $150,000. They pay $7,000 of state income tax and give $1,000 in charitable donations each year. They were renting and not itemizing deductions in 2017 because they didn’t have a house and the standard deduction was $12,700, which was more than their itemized deductions. Under the old rules, if they bought a house and incurred real estate taxes of $4,000 and a mortgage interest deduction of $11,000, their total deductions would have been $23,000.

Before the tax code changes, the purchase of the house would have provided $10,300 additional deductions over the old standard deduction of $12,700 and roughly $3,000 of tax savings. Now with the tax overhaul, the total itemized deductions are $22,000 (remember that state and local income taxes plus property taxes are limited to $10,000). So the itemized deduction is less than the standard deduction of $24,000.

Home Ownership Still Has Benefits

Certainly, even without any tax benefit, there continues to be some significant benefits to owning a house:

  • Predictable monthly housing payments
  • Appreciation
  • Freedom to make modifications
  • Cheaper than renting
  • You can live there forever
  • Increased privacy
  • Become part of a community
  • Build equity
  • Provide a retirement nest egg

Some States Will Feel the Impact More

It would be reasonable to conclude that with some of the tax advantage of home ownership taken away, some couples who are on the fence may wait another year or more before buying. This new dynamic, along with the new potential limitations on interest and real estate taxes, could slow down the housing market and some areas will likely be hit much harder than others.

Individuals in states like California or New York will likely be hit hardest because their wages, state income taxes, housing prices and real estate taxes are all very high. Taxpayers could be incurring $50,000 to $100,000 or more total in state income and property taxes and only allowed to deduct $10,000. And, if they are buying a very expensive house, interest paid on any mortgage amount over $750,000 would not be fully deductible.

Although it's too soon to see the true impact of the new tax law on homeownership and home prices, one thing is for certain - there will be some winners and some losers. (For more, see: Trump's Tax Reform Plan.)