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How the New Tax Plan Affects Homebuyers

LB Note: This week's post is a syndication of a piece I wrote for LendingHome.  This article has been lovingly republished with permission. Have a great week!

If you’ve been keeping up with the news, you’ll know a pretty controversial tax plan recently passed both the House and the Senate, and the final version of the bill was signed into law by President Trump in December. (Pssst –  here's a great article from Fortune.com on when those changes are said to take effect.)

Regardless of your stance on the proposed changes, it’s important for consumers to pay attention because these new tax laws will affect your own personal finances: from healthcare to student loans, and even your first (or second!) home purchase.

 

Note: If you’re a current homeowner, you’ll be grandfathered into the old tax incentives if you bought your home before December 15th, 2017 however, if you’re thinking about buying a home in the near future below are the changes to factor into your buying decision.

Need-to-Know #1 – Future Homebuyers May Have a Lower Cap on Mortgage Interest Deductions

Previously: Homeowners could claim an itemized deduction on all mortgage interest on properties valued up to $1.1 million. This includes interest paid on any mortgage you may have – both a primary residence and vacation home.

Now: Homeowners who buy in the future will only be able to deduct interest paid on the first $750,000 of property value. For example, if you decide to buy a $800,000 home, you’ll only be able to deduct interest on the first $750,000. Assuming a 4% interest rate, this is the difference between deducting $32,000 on your taxes (4% of $800,000) and $30,000 (4% of $750,000).

While this may not seem like a lot to those shopping for homes in this price range, the number you aren’t able to deduct increases the more expensive your home is over the $750k threshold.

It’s also worth noting that in the new tax plan, homebuyers will only be able to deduct mortgage interest on your primary residence, so if you decide to buy a second property, there really won’t be any tax benefit to doing so.

The Bottom Line: Unless you buy a home over $750,000, this change to the tax law likely won’t mean much for your personal bottom line. However, for those looking to buy in higher cost areas (such as New York, San Francisco, Chicago, and Los Angeles) where many of the homes first-time buyers are looking at sell for well above the half-million mark, those buyers may have to think more deeply about whether they buy or rent in the long term. CNBC reports that mortgage interest cap with revert back to $1 million in 2026.

Need-to-Know #2 – Selling a Home Will Be Different in the Future and May Affect Demand

Previously: Sellers were able to exclude up to $250,000 from capital gains tax (or $500,000 for couples) when selling a home if they’ve lived in the home as a primary residence for at least two years.

The Chatter: Previous versions of the new tax bill were more strict – proposing sellers be able to exclude the same amount, but only be able to do so if they’ve lived in the home as a primary residence for five out of the last eight years. (This is the big one I was watching (personally) because it directly affected me and how much I'm able to make off my first home purchase. )

The Bottom Line:  This is a win for future home buyers as extending the capital gains timeline can greatly impact the real estate market in your area. Extending it may have forced some homeowners to stay in their homes longer, therefore decreasing inventory in your area, and increasing the prices for available homes. Thankfully, in the finalized version, this did not change.

Need-to-Know #3 – No More Deductions for Home Equity

Previously: Married couples filing jointly can deduct interest on a Home Equity Line of Credit (HELOC) on up to $100,000. (Singles can deduct interest on $50,000.)

Now: The Senate version of the tax plan eliminates itemized interest deductions for all home equity lines of credit and there's no grandfathering in.

The Bottom Line: Over 52% of homeowners are renovating, and home equity lines of credit are a big way for middle-income earners to finance home upgrades and repairs. After being in the home for a period of time, first-time homeowners may rely on the equity in the home to make cosmetic changes, net more money from the sale, and upgrade to a better/larger home.

Eliminating deductions for home equity lines of credit may discourage both owners and investors from renovating properties. Homebuyers of tomorrow may be forced into buying a “fixer upper” in order to enter the market at all, or pay a premium for the few move-in ready homes.

Need-to-Know #4 – Caps on State and Property Tax Deductions

Previously: Homeowners can deduct state, local, and property taxes to lower their overall tax liability–a fancy word for the amount you owe the government in taxes.

Now: All property deductions (state and local) are capped at $10,000.

The Bottom Line: Once again, these changes are not great for those home shopping in expensive markets, where property taxes are often above $10,000 annually. This proposed change is just another barrier to entering the real estate market for those who live and work in expensive metro areas.

 

The new tax plan does offer a silver lining or two. 

  • The newly increased standard deduction ($12,000 for singles, $24,000 for couples…nearly double the previous deduction) will enable millennials to receive larger tax refunds, making it easier to save up a larger down payment on that first home purchase.
  • Industry analysts also predict changes to the tax plan may decrease demand for homes, which means prices in many markets may fall (allowing current home shoppers to receive a better deal).
  • Lastly, the new tax plan may cause first-time buyers to be more financially savvy when it comes to the home purchase; instead of stretching their budgets to afford the “dream home”, with zero economic incentive for expensive homes, these tax changes may keep buyers within their budgets.
  • There is a fantastic interactive slider here from Curbed.com that allows you to play around and see how much you'll save with the new tax cut that starts this year. Keep in mind, these individual tax cuts expire in 2025, so enjoy it while it lasts.
Nervous about buying a home? Ease the pain with FBL’s free home buying checklist Click here to download !

 

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