How will the new tax code affect your home purchase or sale?

The Real Estate Dads
The Real Estate Dads
Published on February 26, 2018

How Does the New Federal Tax Code Affect Residential Real Estate and Home Owners?

There has been much talk and speculation on how the new tax code affects current home owners and the residential real estate market. Even though the tax code was recently changed, we won’t know the true effect for at least a year (when people file 2018 tax returns). We may see some trends before then, but it takes time for change to take place.

There are two major components of the tax bill that pertain to residential real estate: 1) The reduction on the allowable limit of the Mortgage Interest Deduction (MID) and 2) The reduction in allowable deductions of the State and Local Tax deduction (SALT) which includes property taxes.

Below you will find a brief overview on how these two items in the tax code evolved from the original proposal to what was signed into law.

1) Mortgage Interest Deduction Original Proposal: Reduce the limit on the mortgage interest deduction (MID) amount from $1,000,000 to $500,000. The New Tax Code: Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Loans obtained previous to 12/14/17 up to $1 million are grandfathered. Impact on the Market: Assuming a 20% down payment, this reduction in the MID will impact buyers that are purchasing a home between the prices of $938,000 and $1,250,000. Any home under the lower price is still covered and any home over the higher price was not covered under the former tax code either. 2) State and Local Taxes (SALT) Original Proposal: The elimination of the state and local tax deduction (which includes property taxes). The New Tax Code: Allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. Impact on the Market: Most experts agree that higher taxed regions will be impacted as homeowners in those communities now have a cap on these deductions. My Thoughts: In my experience as a local Realtor, my clients’ motivation to buy and sell their principal home vary, but tax savings was very low on their list of reasons if on it at all. The desire to buy a home is still strong and with such limited supply, I believe prices will continue to rise until supply and demand even out. A sense of community, ownership, not paying rent (as rental prices sky rocket) and long term investment continue to be the top reasons why people buy homes.

Disclaimer: This guide is not meant to be a resource for tax advice. You should seek tax advice from your accountant or tax professional who will explain how the entire tax code will affect your personal return. Some of the information may be revised as the analysis of the new law evolves.