Now that the dust has settled on tax reform, what do you need to know as a homeowner or aspiring homeowner?
The changes that most directly relate to housing are listed below along with the impact they have on various personal situations.
Change #1 – The limit on deductible mortgage debt was reduced from $1,000,000 to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
- Current homeowners – No change. No need to do anything. Also note – Homeowners may refinance existing loans up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
- Homebuyers purchasing a home with a loan smaller than $750,000 – No impact.
- Homebuyers purchasing a home with a loan greater than $750,00 – May want to consider a larger down payment to bring loan amount down to $750,000. If that’s not feasible, the loss of the deductibility on the $250,000 differential between $750,000 and $1 million for those who have a loan amount of a million or more will result in paying about $3,500 more in taxes annually at today’s interest rates and assuming a tax rate of 35%.
Change #2 – The tax deduction for property taxes, and state and local income taxes and sales taxes is now limited to $10,000. This $10,000 limit applies for both single and married filers.
- Homeowners who pay less than $10,000 in property, state, and local taxes – No impact.
- Homeowners who pay more than $10,000 in property, state, and local taxes – Significant loss of deductible taxes could potentially cause some homeowners to consider selling their existing home to lower their property taxes. On its own, that’s probably not a reason to cause many home owners to move, but lower property taxes may become a more important consideration for those who were already planning a move.
- For homebuyers – The change should lead to more awareness of the property taxes on any listing under consideration. When combined with one’s state tax burden, knowing whether one falls above or below the $10,000 limit is important. That said, most homebuyers choose a home because it meets their needs and they want to live there. The tax benefits are “icing on the cake” and not the primary driver.
Change #3 – Increasing the standard deduction from $6,350 to $12,000 for individual filers and from $12,700 to $24,000 for joint filers.
- For homeowners who do not itemize deductions – the new standard deduction will apply.
- For homeowners who itemize – The increase in the standard deduction may be greater than itemized deductions, so now the standard deduction will be taken. These home owners may want to consider paying down their mortgage to reduce their interest payments which no longer have a tax benefit.
- For homebuyers – Those who qualify for the standard deduction, even with the addition of a mortgage payment after purchasing, may want to consider a smaller mortgage and a larger down payment if able since mortgage payments no longer have any tax benefits for those taking the standard deduction.
These are the major changes. The law also includes several changes that appear to make investing in real estate much more attractive. The details of these changes are too complex for the scope of this newsletter, but if you are real estate an investor or thinking of becoming one, this may be a good time to consult your tax advisor…and me!
Lastly, a final note in our housing guide to tax reform. Several proposed changes were bandied about and made headlines in the negotiations leading up to the final bill. Many of these, however, were left on the table and did not make the final bill. Let’s lay those to rest because they have no impact on housing or your real estate decision making. These “dogs that didn’t bark” include:
- No changes to the capital gains exemption on the sale of a home ($250,000 single/ $500,000 married)
- Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
- Interest remains deductible on second homes, but subject to the $1,000,000/$750,000 limits.
- Like-kind 1031 exchanges for real property were preserved
While the new tax rules may influence the decisions and behavior of some home buyers, sellers, and homeowners, most will continue to make real estate decisions first and foremost based on their lifestyle needs, desires, and dreams. At the same time, we feel it is important to always be aware of the tax considerations. I hope this guide helped in that regard.
A Refreshing Look at the Question “What is my House Worth?”
Let’s take a look at some of the stats for our area to get a better idea of what is going on in the local housing market!
In Adams County for Dec 2017, the average sales price* was:
- $346,599 for Single Family Homes (up 10.0% from 1 year ago)
- $250,000 for Condos/Townhomes (up 11.1% from 1 year ago).
I have access to detailed stats across Colorado and can help you find out the worth of your property any time. I can also help you determine what your home is worth even if it’s in a different area. As always, I am here for you. If it’s time for you to buy or sell, let’s talk.
*Median sales price based on a six-month moving average