A new law signed into effect by President Donald Trump, the Tax Cuts, and Job Act, is likely to impact many American citizens. You might be unsure, a little nervous, or just confused about what this new tax law supposedly has in store. Keep reading, and this article will hopefully clear up some confusion and give you a bit of insight into how this law will affect your life.
Mortgage-interest deduction is thought to be the sacrosanct pathway to fulfill one step in the American dream: owning a house. Originally, the House proposed a new cap of $500,000, but that did not succeed. This big change, which is said to be a “direct threat to homeowners and consumers,” is the decrease of mortgage-interest deduction.
The new law reduced the highest amount of mortgage debt from which interest can be deducted from taxes from $1 million to $750,000. Any loans taken out after December 15, 2017, fall under this category, so only new mortgages will be affected. This law remains true for the ownership of a second home or a vacation home. It is predicted that this new tax law will affect mostly cities with upper-middle-class housing markets. The very wealthy probably won’t be affected, since they exceed the deduction and thus do not itemize, and often buy real estate with cash.
Due to the doubling of the standard deduction, if you forgo itemizing, this new cap may not affect you. Because people will be receiving less than the standard deduction back if they choose to itemize, the initiative to itemize will probably decline. The tax-related benefits that come from owning a house will also be lessened. Previously, less than half of the homes in the U.S., about 44%, were worth enough that owners could itemize. With the new law, that percentage has decreased to roughly 14% of homes.
Rather than benefiting, many homeowners will now end up paying more in taxes since the law decreases the amount of taxes permissible to itemize. Homeowners could also lose significant equity due to the drop in home values. Compared to estimations without the new tax law, Moody’s Analytics project that home prices will fall 4 percent, impacting wealthy homeowners and the real estate lobby. For first-time homeowners, this new law will mean taking a closer look at their budget and could potentially deter them from moving to a city or county with high property taxes. This law could make the difference for an individual or a couple renting for another year or being able to finally purchase their first home.
Another change brought on by the Tax Cuts and Job Act is the limit of local and state property taxes. With the new law, up to $10,000 of local and state property taxes may be itemized or deducted; in the past, this amount didn’t have a ceiling. This will largely affect homeowners in areas with high local taxes, such as New York, Connecticut, and California. Eleven of the 12 House Republicans that voted against this bill call one of these three states home. Again, would-be buyers may be stalled in their ability to buy a house. Now, the benefits of owning a home are being cut down.
Donna Olshan, president of Olshan Realty, located in New York City, stated that most of her clients pay over six figures per year in New York state and local taxes. What is this new law going to mean for them? Selma Happ, a chief economist in California, said that this new law could bring devastation for those who reside in the San Francisco Bay area.
The third change caused by this law is the increase in standard deductions. Under the new law, the standard deduction for taxpayers doubles to $12,000 for individuals and $24,000 for those filing jointly. With this change, taxpayers will likely decide to choose the standard deduction rather than choosing to itemize.
Where do we see these changes affecting the real estate market? Due to the variance of property taxes between cities and counties, the prices of homes for sale in certain areas will obviously be more affected than others. Specifically - in districts with a highly ranked education or school system, you may see more houses appear on the market. Homeowners will have to weigh the pros and cons of staying or leaving the school district if they can no longer write off some their property taxes. Because individuals will have to consider the value of the location, there may be a reduction in home sale prices in locations with high home ownership taxes.
The new bill will bring in revenue for the government, but will not be beneficial for all American citizens. Many people will have to reconsider their budget and make changes. Whether you are a renter, soon-to-be homeowner, or a current homeowner, it is crucial to educate yourself on the new tax bill and how it will impact you.