They said that 2018 was going to bring significant changes to the economy and the real estate market. They said that the rising interest rates were going to cause a slowdown in new home purchases. They said that the tax reform was going to create a drop in home prices. They said a lot of things that have yet to come to fruition. So far, 2018 has brought a continuation of a robust real estate market, and an intensifying economy which continues to mystify fundamental principles.
When the chatter was at its peak on the 2018 tax law changes being proposed, one of the big areas of concern for homeowners was the impact on the real estate market as to mortgage interest and real estate tax deductions. The 2018 tax law changes impacted both areas, but neither the mortgage interest deduction nor the property tax deduction were eliminated entirely, and instead, they were modified in a way that has not brought any substantial change to the way people are treating home purchases.
With “Tax Season” around the corner for 2017 income, I thought it would be appropriate to visit the tax implications of the tax reform as it would pertain to next years filings. I am still surprised at the lack of understanding in the marketplace as to the true impact that the tax reform will have on the real estate market. It’s sensible to break down the effect of the new tax reform specifically to the core areas of how it would impact homeownership.
Mortgage Interest Deduction
The new laws cap the interest deduction for eligible debt up to $750,000. While old loans created prior to the law change date are still available up to $1 million, new mortgages closed after the enactment date are subject to the lower threshold. It is important to remember that it is not the cost of the home or the value of the home that triggers this determination, but the amount of the mortgage debt. This will have a bigger impact in certain New York/New Jersey areas more than elsewhere in the country. The change basically means “business as usual” for over 9 out of 10 homeowners in the U.S.
Real Estate Property Taxes
The total state and local tax deductions are now capped at $10,000, when applicable. This is where some homeowners could experience a difference in more affluent areas where the average real estate taxes exceed the $10,000 level. The thought here is that the increase in the standardized deduction will leave most of the nation at an advantage irrespective of the imposed cap. Keep in mind, this is only applicable to the extent that a tax filer itemizes their deductions as we will see below.
Standard Deduction Increase
The standard deduction is now at $12,000 for an individual and $24,000 for a married couple, filing jointly. The option to itemize could go away entirely if the standard deduction provides a higher level of tax savings overall. If the standard deduction is more than the tax benefit of mortgage interest and real estate taxes, the above two deductions become moot. Of course, it’s not entirely beneficial as the personal exemption is also eliminated, reducing the benefit of the higher standard deduction by as much as $4,150 per person. This could be enough to prevent the use of itemization, which could prove detrimental to those that would have benefited in previous years.
Simply put, the changes did not broadly make taxes go up, and did not wipe out any specific benefit entirely (except the personal exemption) - instead, the real impact depends on a specific tax filer’s situation. This is why two homeowners in the same town with the same house and market value could end up having very different tax results with the 2018 changes. As always, work with a trusted tax professional to understand how these changes will affect your personal tax situation. It is the role of the professional to guide people with current market information, intelligence and direction to make informed decisions in real-time as to how their specific circumstances can be impacted. Shout out and Happy Birthday to Naomi Klinger.
By Shmuel Shayowitz
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]