How Might Proposed Tax Reforms Affect Housing Markets?
Interest Deduction Tax Changes and how it could affect the market
Tax reform is big in the news lately, with a bill going through Congress. This bill, the "Tax Cuts and Jobs Act" exists currently in House and Senate versions which will have to be reconciled before it becomes a law. However, it includes some fairly significant changes to the existing tax code, intending to simplify it and lower taxes in some areas.
One major change is the reduction in the mortgage interest deduction for new homeowners - the cap is being cut from $1 million to $500,000 (this does not affect existing owners). But is this likely to affect you?
One answer is: Not as much as you think. The reason is that the mortgage interest deduction can only be taken by taxpayers who choose to itemize deductions - of whom only less than a third do according to IRS data from the Tax Foundation. The bill also doubles the standard deduction, which will further reduce the number of people itemizing. In fact, it might be argued that there may be a deliberate attempt here to reduce itemizing as the bill also eliminates other deductions like the student loan interest deduction, deduction for medical expenses, alimony payments and repeals the alternative minimum tax. It also gets rid of the deduction for second homes and home equity loans.
The proposal still has a ways to go before becoming law as the final reconciled bill must be voted on again and if passed, President Trump then has to agree to it all. It is not uncommon for the eventual law to be quite different from the bill as it is first unveiled. But many are trying to take advantage of being grandfathered in to the higher mortgage deduction cap as they anticipate this reform on the fast track to be finalized in the beginning of 2018.
UPDATE January 5, 2018: The bill was passed recently and here are the most notable items:
Personal and state/local taxes
A $10,000 cap on deductions for state and local income taxes and property taxes combined. Previous law allowed full deductions on the latter. However, property and sales taxes paid by a business such as a sole proprietorship or on rental property will remain fully deductible.
The good news; the Washington Metro area was not the hardest hit since they are not considered high tax states.
Mortgage Interest deduction
Eliminates home equity interest deductions
Homes purchased Dec 15th, 2018 and after, are now capped to the first $750,000 borrowed. Nationwide homes sold in 2017 that had mortgages over $750,000 comprised only 3.5% of the total. For more information on this article contact your loan officer. For additional tax related questions on other items in the bill we suggest reaching out to a tax professional. You may also read the full bill on cnn.com.