For several months, the upcoming changes to the 2018 tax code has been the topic of much conversation, particularly in the real estate industry. Planned reductions to the mortgage interest deduction even prompted outcry from organizations like the National Association of Realtors and the Mortgage Bankers’ Association.
But, much of this conversation has been devoid of actual facts given that the changes hadn’t yet been approved by Congress or released to the public. That changed in December, allowing real estate industry professionals and clients alike to better anticipate how those changes will impact the market.
Here is how the 2018 tax code changes are most likely to impact real estate buyers, sellers and the professionals that serve them.
Mortgage interest deduction limits
In past years, mortgage interest deductions for first and second residences were capped at $1 million of total mortgage debt for married filing jointly, or $500,000 for single filers. In 2018, this amount will be reduced to $750,000 for married filing jointly, or $375,000 for separate filers. This is a substantial reduction that is likely to impact some markets more than others.
How will the Mortgage interest deduction changes affect us here in the Phoenix Valley?
- While these changes will disproportionately impact higher priced markets such as those on the coasts, here in Phoenix, we can also expect to see some impact in homebuying at the higher end of the market. More expensive areas such as Paradise Valley, Scottsdale, Ahwatukee Foothills and certain other markets, along with homes where loan amounts will exceed the cap (i.e., about $700,000 and up) will likely see the greatest impact.
- However, in most of our area the average homebuyer will not be directly impacted by the change, though there may be indirect impact as more buyers who might have purchased a home that exceeded the current limits concentrate instead on homes that will qualify for the interest deduction. This will add to the already high demand for homes in those qualifying price ranges.
- Because the mortgage interest deduction cap is for first and second residences, we might also expect to see impact on the purchases of second residences, as it home buyers are more likely to exceed the cap. Again, this will likely result in more competition in the lower price ranges.
- The reduction only applies to new purchase loans, not refinances. The exception is cases where the refinance is for a higher amount than the original loan. Those borrowers will be subject to the new interest deduction limits.
- The interest that a borrower pays on a any home equity loan (HELOCs) will not be tax deductible IF the HELOC was acquired after the purchase of the home. IF the borrower acquired a HELOC for the purchase of a home, the interest will be deductable and limited to the $750,000 loan cap.
Property Tax deduction capped at $10,000
Another important change applying to homeowners and all taxpayers is a reduction in the amount of state and local taxes that can be deducted from Federal income tax. Deduction of state and local taxes are now capped at $10,000. This applies to any combination of state or local taxes, including property tax. Property taxes make up the vast majority of state and local taxes that tax filers deduct. In other words, you won’t be able to deduct any more than $10,000 per year of property taxes. Because Arizona property taxes are very reasonable compared to other states, we won’t see this change affect many homeowners. We expect this change to affect homeowners who own properties that are valued at more than $1.5 million.
Capital Gains for sellers
On the seller side, there are no changes to the home sale gain exclusion rules. Home sellers can continue to exclude up to $250,000 in home sale gains (i.e., price increases above the price originally paid) for single filers, or up to $500,000 for married filing jointly. Earlier versions of the tax code changes had included the elimination of this deduction, but those changes were ultimately not adopted.
One other change that could impact buyers and sellers, though likely not a decision-making factor for anyone, has to do with deductions for moving-related expenses. That deduction has been eliminated.
Standard Deductions are Increasing
The Trump administration has claimed that the overall goal for the 2018 tax code is to simplify and make filing taxes easier. To that end, while many smaller deductions such as the moving deduction mentioned above have been eliminated, the standard deduction (available to all filers) will nearly double, while personal and dependent deductions will be eliminated.
As the year wears on, we’ll see how these changes are received in the market. Given the rapidly accelerating prices of the last couple of years, a dampening affect in the upper price ranges may have a stabilizing effect on our market – which could be good news for buyers, sellers and real estate professionals.
Signature Home Loans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.