On December 22nd, Congress passed the Tax Cuts and Jobs Act, or H.R. 1, and the president subsequently signed the act into law. This new tax bill affects nearly all taxpayers, but the pertinent question we’d like to explore today is how mortgage holders are affected.
The act can be read in its entirety here on Congress.gov.
Since the new tax bill is somewhat dense, let’s take a look at the key points that are likely to affect you as a homeowner—or as a home seller.
How Does H.R. 1 Affect Homeowners?
Whether you have a single-family or multifamily mortgage, the new tax bill will change the way you calculate deductions.
There are three major points from H.R. 1 that homeowners should be aware of. In summary, these points are:
- The mortgage interest deduction limit has been lowered to $750,000.
- You may still deduct up to $10,000 in property taxes.
- HELOC deductions have been eliminated.
In more detail, homeowners should understand that their standard $10,000 deduction in property taxes will remain the same. However, mortgage interest deductions for first and second homes will also remain in place, but the deduction limit has been reduced from $1 million to $750,000. The bill completely removes HELOC (home equity line of credit) deductions on a homeowner’s primary residence.
Lowering the mortgage interest deduction (MID) limit is perhaps the most noteworthy change of the new tax bill, as it may alter the way you calculate deductions. It’s likely that more homeowners will take a standard deduction rather than itemizing deductions since the average amount of homes with a high enough value to make itemization financially advantageous is smaller than before H.R. 1.
What the New Tax Bill Means for Home Sellers
For home sellers, it’s equally as important to understand what the bill does not change. Prior to the passage of the act, plenty of speculation and hearsay was floating around. We now have the opportunity to understand the reality of the bill. The Tax Cuts and Jobs Act keeps two significant currently-existing options the way they were before:
- If selling a primary residence, homeowners can still exclude up to $500,000 of the gain if they’ve lived in the home for two to five years. This comes as a relief to short-term homeowners interested in selling, since prior to the passage of the bill there was speculation that this yearly requirement would be bumped up to five to eight years.
- H.R. 1 retains business interest deductions for real estate.
Notably, the tax bill may improve the buying power of those interested in real estate on the low or middle end of the spectrum, since the standard deduction option for all taxpayers is effectively doubled.
It’s also worth noting that the bill retains the Low-Income Housing Tax Credit (LIHTC) for investors dedicated to building and maintaining affordable housing. Even if you’re not an investor of this type, the fact that this credit remains will likely have an industry-wide impact in that it helps preserve consumer access to mortgage credit at an affordable rate. Similarly, private activity bonds (PABs) will continue to be tax-exempt.
How Will the Tax Cuts and Jobs Act Impact the Real Estate Market?
At the time of this writing, it’s too soon to definitively state what the long term effects of the new tax bill on the real estate market will be. With that in mind, there are a handful of educated guesses worth considering.
For example, macroeconomic research firm Capital Economics predicts that the overall cost of homes for sale will rise. However, this will not likely have a substantial negative impact on the real estate market because most families will experience an overall reduction in taxes and therefore may be more likely to put those additional funds toward a home purchase.
The firm also predicts that due to the MID reduction, homeowners of more expensive real estate may experience an negative impact. Similarly, Consumer Reports’ Tobie Stanger believes that the upper end of the real estate market may stagnate entirely, but maintains that the consequences of H.R. 1—be they positive or negative—will take at least one or two years to be fully understood.
Selling Your Home and Have More Questions About How the Tax Cuts and Jobs Act Affects You?
If you’re considering a home sale and you have questions about how about how the Tax Cuts and Jobs Act affects you, please feel free to contact Cheri Brandon. If you’re tired of political opinion getting in the way of economic facts, Cheri can help you get to the truth in this transitional period.
After being in the real estate industry for over a decade, Cheri and her team aren’t strangers to the ever-changing political climate and how it impacts the real estate business. Cheri knows how to “roll with the punches” and can help you navigate the evolving home sales sector in 2018 and beyond.