Posted by Fletcher Accounting and Tax Service Inc.

Effect of New Tax Laws to Potential Homeowner

Effect of New Tax Laws to Potential Homeowner

In the US, owning a house is one of every American’s biggest dreams. It is almost embarrassing to tell someone that they are only renting the place they live in - it’s giving off a negative indication to their social status. According to 2016 survey by Pew Research Center, found out that 72 percent of renters would like to buy a house in the future.


In 2017, President Donald Trump signed the Tax Cuts and Jobs Act after weeks of having heated discussions and deliberations by the Congress. 


Right before leaving for the Christmas holiday they finally passed tax legislation designed to lower taxes and stimulate the economy. Taxpayers are unsure of the changes that this law will do to the – negative or positive benefits. For homeowners, there could be a few changes which could mean choosing between buying a home and deciding to rent for another year or looking to buy in a different town to avoid paying higher property taxes. As a result, there's a good chance you'll see some housing markets dip in sale prices.


Deductions on Mortgage Interest


For homes that are purchased after December 15, 2017, the new tax law decreased the maximum amount of mortgage debt you can deduct interest on your taxes from $1 million to $750,000 unless your home was already under contract by December 15 and the sale closed by January 1, 2018. For homeowners in California coast and Northeastern seaboard, it would be less hassle for middle-class families to pass the $750,000 threshold for their houses are in median sale prices. For first-time homebuyers, they delay longer the plan to purchase because of the additional costs to consider when they're just starting to break into the market.


Limited Deductions on State and Local Property Taxes 


In the old tax law, all state and local property taxes were deductible in the federal tax filing without limit. Present law, the deduction is now on $10,000 limit both on state and local taxes, including income and property taxes. Consider that half of the states have property tax rates of 1% or above, creating a $10,000 or greater property tax bill alone on a $1 million home. New Hampshire, Illinois, and New Jersey all have rates above 2%, thus consuming the entire deduction limit with property taxes on a $500,000 home. This new law redefined what home affordability means to potential buyers, the mortgage interest and local tax limitations are likely to depress the home buying market in areas with high taxes and high property values. As a result, homeowners in these areas are likely to see slower gains in home appreciation as local market demand slows down.


Increase in Standard Deductions


Under the new tax law, the standard deduction for taxpayers doubled to $12,000 for individuals and $24,000 for couples filing jointly. Homeowners with lower income find this changes will lead them to take the standard deduction rather than itemize their filing.


The interest on a mortgage for a second home is still deductible under $750,000 limit. Interest on home equity loans is only deductible if the debt is taken out to improve the residence, effective through the end of 2025. If you have two mortgages and when combined would still be less than $750,000, the Tax Cuts and Jobs Act could still change your purchase’s tax implications. The $10,000 cap on state and local tax deductions holds no matter how many homes you own, so it’s important to consider how high a second home would raise your total property taxes.


According to a study by the National Association of Realtors, if becoming a homeowner becomes more expensive, that could also affect home values too. Home values and property tax rates vary widely from city to city and county to county, this means that there are certain areas which are likely to see home sale prices impacted due to the tax act, while other areas may appear unaffected. The homeowners in suburban and rural areas are less affected by the mortgage interest cap and property tax deduction and may find home prices rising in their area. For prospective homebuyers will flock and move to seek affordability from the urban areas. As a result, demand on homeownership thus raises raising the value of existing homes.
 

Fletcher Accounting and Tax Service Inc.
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