How Changes to the Tax Code Impact Homeowners

by James SheaDecember 27, 2018

The tax code has been set up to promote homeowners and allow people to pursue the American dream. For years, Congress filled the tax code with financial incentives to purchase a home. People can deduct mortgage interest paid on their taxes, and some home improvement projects are tax deductible. However, the most compelling reasons to purchase a home are often not economic. You can consider stability, laying down some roots and the ability to renovate and customize your home as major non-financial reasons for buying a home. Plus, you don’t have to deal with a landlord on a monthly basis.

Wooden figures of the family stand near a wooden house and money. Property tax. Payment of taxes to the state. Law-abiding citizens. Tax burden, buying a house. Juristic services.

Last year, Congress passed major tax reform legislation. The tax bill modified or eliminated many of the tradition tax incentives to purchasing a home, and that’s the reason why top real estate groups in the country opposed tax reform. The National Association of Home Builders and National Association of Realtors both publicly lobbied against the bill. They were concerned that the tax reform gave huge tax breaks to large corporations, but it impacted American’s ability to pursue the dream of home ownership.

“By threatening the value of the largest asset held by most Americans, these changes will hurt the middle class by lowering household wealth,” said Granger MacDonald, chairman of the NAHB, at the time the legislation was passed.

Tax changes and the increase in interest rates appear to be having an impact on the housing market. Home sales declined for six consecutive months in 2018, before rebounding in October. Sales were down 5.1% when compared to October of 2017, and many are projecting that the downward trend will continue in 2019.

And soon, Americans will begin working on their 2018 taxes, and they’ll become more aware of the impacts of tax reform on home ownership.

Increase in the standard deduction

One of the biggest changes from tax reform was the increase in the standard deduction. When you file your taxes, you have the opportunity to itemize all of your deduction. That means calculating mortgage interest paid, determining charitable donations as well as adding up other deductions in the tax code. Many people who pay a mortgage benefit from itemizing.

People who don’t itemize get a standard deduction. The standard deduction went from $6,350 in 2017 to $12,000 in 2018 for single taxpayers. For married couples filing jointly, the deduction went from $12,700 before tax form to $24,000. The goal was to simplify the tax code and reduce the time needed to prepare taxes. The number of people filing an itemized return is expected to be reduced to 8% as a result of tax reform.

Some experts have been concerned that the changes in the tax code will hurt the demand for a mortgage, because less people will be able to itemize. That might reduce the demand for a housing, given the decline in economic incentives to purchase a home.

“In a way, the federal government is extracting itself of its encouragement of home ownership,” said Jonathan Miller, president of real estate appraisal firm Miller Samuel.

Reduction in interest payments

The tax law also changed the maximum amount that can be deducted on your taxes from a mortgage and other home ownership expenses. If you buy a home between now and 2026, you can deduct the interest on up to $750,000 in mortgage debt used to purchase or improve it as an itemized deduction. That amount is down from $1 million previously, and people with existing mortgage are grandfathered into the $1 million rate. The rate only applies to a person’s primary or secondary residence.

Tax day is April 15th for filing to IRS with red push pin in calendar for reminder.

The change will impact buyers at the high-end of the housing market or those who live in expensive markets like New York City or San Francisco. Many real estate experts have argued that the law increases the burden on high-end home buyers and removes incentives for people to purchase more expensive homes. Some, however, believe that home buyers are calculating the cost of tax reform into a purchase and tax reform will not have a huge impact.

We haven’t seen buyers lower their price point,” said Anslie Stokes, who owns the Stokes Group in Washington, D.C. “All buyers are aware of it, and they’re factoring it in. But they’re not changing what they want to do.”

Limit on property tax deduction

The other major change to the housing market from tax reform was the limitation on the deduction of state and local taxes on your federal taxes. State, and Local Taxes (SALT), has been around since 1913 when the U.S. first instituted the federal income tax. The National Governors Association and local groups support the tax break, because they argue that property taxes are mandatory, and limiting the ability to deduct them amount to double taxation.

Entrance of residential house with concrete pathway in front of the house.

The law will impact high property tax states, many of which are located in the Northeast. But other states, like Texas, which depend on property taxes as a major source of revenue will be impacted. According to the Tax Foundation, people with incomes over $100,000 receive more than 88% of SALT deduction benefits.

There are clear winners and losers,” said Adam Kamins, senior economist at Moody’s Analytics. “States in the Northeast and along the coasts are hit pretty hard, and states in the South and Mountain West come out ahead.”

Prior to tax reform, people could deduct all of their SALT taxes, but tax reform limits SALT taxes to $10,000 starting in 2018. So, people who itemize and pay a large property tax bill will see a reduced benefit from tax reform. For example, Boston-area taxpayers could be significantly impacted. A recent analysis found 12.4% households pay more than $10,000 annually in SALT taxes.

“The SALT deduction is not only valuable to taxpayers, it also often pushes them out of standard deduction and they benefit from other deductions as well,” said Lilian Faulhaber, associate professor of law at Georgetown University Law Center.

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About The Author
James Shea
James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.