DESPITE CHANGES, “POSITIVE FUTURE” ANTICIPATED
(Feb. 20, 2019) — Everywhere you go – in the office, at the supermarket, and even in your favorite pizza house – everyone’s talking about the same big thing: TAXES. Regarded as the biggest tax overhaul of the past 30 years, Trump’s Tax Reform has gotten more buzz than the 2019 Super Bowl, the Mardi Gras, or the 2018 Grammy winners.
Signed on December 22, 2017, the Tax Cuts and Jobs Act includes substantial changes in U.S. taxation, affecting individuals, households, and local and foreign businesses across all industries, particularly real estate. Whether you are a home buyer, an investor, or a property seller – there are some important things you need to know about the new tax law.
The mortgage interest deduction got a new limit.
One of the biggest changes in the U.S. Tax Law is the mortgage interest deduction. Under the previous law, you could deduct the interest of a mortgage that costs up to $1M. But now, the deduction only covers $750,000. This means that if you buy a house that’s worth $1.1M at 4% interest, expect to pay the full interest on the remaining $250K. That’s an additional cost of around $208 a month if you’re within the $25K bracket. It may not be that much but it is still an added expense for a typical homeowner (who may be experiencing some financial instability). Fortunately, there are financing options available just in case, such as online cash advance for housing cost.
There is also a discussion about whether people will prefer renting over owning a house due to the said change. Nonetheless, experts agree that the new limit does not significantly impact housing costs in the United States. The average cost of a home in America is $250,000. Thus, the new limit should not affect the majority of taxpayers. Meanwhile, those who are buying premium properties are likely those who have the means and resources to do so, and the additional interest is less likely to affect their buying decision. The effect is felt much more by people buying properties in high-tax states such as California and New York.
Deductible property taxes capped at $10,000
Previously, people were able to deduct 100% of whatever they pay in property taxes, along with deductions from their local state income tax. That means if you’re buying a property worth $1M and your yearly property tax is, say, $80K, you can deduct this amount from the state income tax that you pay. This was particularly beneficial for investors who were buying multiple properties. With Trump’s Tax Reform, however, the deductible property taxes were capped at $10,000. This change is expected to affect the cost of homes in states that have high property taxes and high-income taxes because homeowners are expected to see a decrease in the value of their properties. But to the majority of people living in the US, the tax reform is just going to affect properties that cost at least $800K.
Housing costs will depend on where you live
With the said changes, it is very apparent that the cost of housing will generally depend on where you plan to buy a house. It seems that in states with high property and income taxes, houses are much more prone to price adjustments. Also, homeowners living in expensive coastal cities are expected to experience the biggest loss of tax deductions. Additionally, people trying to sell homes that cost over the $750K cap will find it a little difficult to get their properties sold fast.
HELOC is no longer tax-deductible.
Moving forward, the home equity line of credit (HELOC) is no longer tax-deductible. The new tax code does not allow homeowners to borrow against their equity (for whatever purposes) and deduct the interest on payments from their federal income taxes. But there’s an exception to this rule. Homeowners can still deduct their HELOC interest but only if they use the loan to make substantial improvements in their property and the combined amount of their mortgage balance and their HELOC does not exceed the $750K threshold.
Still a Positive Future Ahead
Trump’s Tax Reform incorporates a massive change in the way people in the U.S. pay their taxes. And because of that, many people can’t help but feel alarmed over the possible consequences. The new tax law is surely going to affect everyone, especially homebuyers. However, the impact is not expected to be huge and the real estate industry still has a positive future ahead.