New Tax Law’s Impact on Housing

Written by Les Detterbeck.

RE411-2014-03-Tax-Deductions-for-Homeowners-POSTCARD-front.jpgMany realtors across the country are not happy about the tax-code overhaul. 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 drive our economy. Now, the new rules will likely reduce homeownership and prices, particularly in those high-cost, high-income areas which have previously been receiving much of the tax benefit.  Here’s why:

Reducing 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 12/15/17. 

Reducing the real estate tax deduction.  Taxpayers under the new legislation 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 of state income taxes and $20,000 of property taxes, they can only deduct a total of $10,000. The remainder is lost.  As you can see, those taxpayers with larger income and with 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, now it’s $24,000 ($12,000 for individuals.)  Here’s a quick example of the impact. Let’s say a young couple wants to buy a house.  Their combined income is $150,000.  They pay $7,000 of state income tax and have $1,000 of 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 mortgage interest deduction of $11,000, their total deductions would have been $23,000.  And therefore, the purchase of the house previously 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.  No tax advantage to buying in their current situation with the new rules.

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

1.Predictable monthly housing payments


3.Freedom to make modifications

4.Cheaper than renting

5.You can live there forever

6.Increased privacy

7.Become part of a community

8.Build equity

9.Provide a retirement nest egg

10.(Perhaps some) tax benefits

11. A yard for the family dog (last on the list, but often a primary reason).

Using the example above, one would expect 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.

Some areas will likely be hit much harder than others.  Individuals in states like CA or NY will likely be hit hardest.  Think of it.  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.

It’s no surprise than many companies are now more intensely looking at moving their company in high-cost, high-income states to better locales.  SC and other states in the Southeast could be key beneficiaries.  States with no state income tax such as TX, FL, and WA are also in good position. 

Even before tax reform, the Charleston regional area has been booming with development.  Earlier this week, I visited the Palmetto Commerce Park in North Charleston, near the airport. It’s amazing. Boeing was the initial draw, and now Mercedes Benz, Cummins, Shimano American, Thyssen Krupp and others have moved in.  ReadySC is helping to prepare the workforce with education and training.  The Charleston region has become a globally competitive destination for business, entrepreneurs and talent. Add to that the climate, beaches, history, culture, food, golf and many more attributes and it’s easy to see how 34 new people move to the region every day. And, that could accelerate.

Finally, let’s not forget Chicagoland. Yes, Chicago can qualify as a high-cost high-income area.  Yet, Chicago is still an amazing place to live.  You’ve got an already thriving business community (Google and vacuum giant Dyson just moved there), four seasons, great athletic teams, super universities, amazing museums, Lake Michigan, food for everyone, Michigan avenue shopping and lots more.

We’ll be following the impact of the new tax law and its impact on homeownership and home prices.  There certainly will be some winners and some losers.

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