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The Tax Cuts and Jobs Act (TCJA)—you know, that new tax law—has given many people a temporary tax break and corporations a permanent one. But one of its bigger surprises: after years of the government supporting American homeownership with tax advantages, the new law has altered some of those benefits. And while reaction has ranged from “This will destroy the industry,” to “It’s about time,” the repercussions—particularly for median homeowners—aren’t completely clear.
Your taxes and the TCJA
Think of the TCJA as a hippo. It’s overweight, ponderous, and while it offers advantages, it also takes surprising bites out of you.
(I know you’re wondering. Hippos are adorable as babies, are brilliant swimmers and secrete useful stuff to avoid sunburn.)
So what’s in the new law?
The standard deduction is nearly doubled, and there are significant changes to the child tax credit. Personal and dependent exemptions are gone. Tax brackets have also changed.
Then there’s housing. Previously, if you had enough deductible expenses that piled up higher than the standard deduction, you used Schedule A on the 1040 and saved some money on your overall tax bill. You need good records, in case you’re audited, and an accountant or tax preparer doesn’t hurt.
The Tax Foundation has found that the majority of people who itemize make $75,000 or more. But that isn’t a rule. Anyone can pay a lot in property taxes and/or income taxes, have huge medical bills, buy a house and pay interest, give a lot to charity—all reasons to itemize. However, if you don’t have many of those reasons, itemizing isn’t worth it, and thus you don’t take advantage of the deduction.
Mortgage Interest deduction
You can deduct the interest you pay on your mortgage. It used to be capped at the interest on the first million dollars in principal value of your mortgage.
Now that cap is $750,000. It affects loans taken out on and after December 15, 2017.
The cap won’t just impact people who crave a million-dollar home. It also hits those who live in high-housing-cost areas and don’t have much choice. The money isn’t sofa change: on a $1,000,000 mortgage (30-year loan, 4% interest rate), the interest is $23,952 a year over the life of the loan, roughly speaking. (In real life, you pay more interest early on.) If you bought that house after the cutoff date, you could deduct only $17,964.
Granted, that doesn’t affect too many people here in the Upper Delaware River region. My totally unscientific study of recent home sales on Zillow.com says that most homes sold here cost under $300,000. But New York City-area housing can be over the cap.
A look at the mortgage chart (page 19) shows that median home prices in and around the city area are high compared to median salaries. And so some would-be homebuyers may opt not to purchase there, because they are simply priced out.
Second-home buyers, including those in our region, could find themselves over the TCJA cap, as it encompasses all mortgages put together. If you buy an expensive primary house on or after December 15, 2017, then add in a local home, you could easily be over $750,000 worth of mortgage.
Could we see a tax exodus to somewhere relatively close by, with cheaper housing and taxes? Like, say, right here? It depends on ability to telecommute or willingness to drive, but it could happen. And that could trigger an increase the competition for houses in the local market, driving up prices.
Many economists believe that the less debt a homeowner carries the better. The mortgage interest deduction, as they see it, encourages homeowners to buy “more house” than they can afford, which in turn pushes up home prices. In this view, frugal homebuyers benefit by not purchasing expensive homes in expensive localities.
State and property taxes
The TCJA caps the deduction of state and local taxes (or sales taxes) and property taxes (aka SALT) at $10,000. If you live in a high-tax state, own a high-property-tax home, or have two homes and two property tax bills, you could see a tax increase.
New York State usually makes the high-tax lists, although it offers ways like STAR (its School Tax Relief Program) to lower the property tax bill; and state income tax has many exemptions and deductions. Pennsylvania offers a homestead exemption. (PA income taxes are flat rate and there are fewer deductions.)
Think you’re safe because you rent, not own? Ha. Your rent reflects part of the taxes your landlord pays.
Second-home owners could also be hurt. Combined, the two loads of property taxes are more likely to push the owner over the SALT cap, according to Alexander Casey of Zillow Research.
Of course, people buy houses for reasons besides tax advantage. And, as the Tax Policy Center has pointed out, low- and middle-income families don’t itemize anyway. Under the TCJA, the higher standard deduction makes itemizing even less useful.
It’s still not taxed.
Never heard of it? Brookings has argued that untaxed imputed rent is the single biggest tax advantage for homeowners. It means essentially that homeowners living in their house don’t have to pay taxes on the rent they would have received if they were renting out the house instead.
Confused? I know. And there’s a lot more to it. But the federal Office of Management and Budget (OMB) has calculated that if it were taxed, that would add $79 billion in revenue.
What’s being done
Unsurprisingly, governors in high-tax states are looking for workarounds. In New York, Gov. Cuomo has a multi-part plan that includes creating charitable funds for schools and health care that might circumvent the SALT cap. Keep an eye on the news and check with a tax pro for updates.
And to paraphrase policy expert Yogi Berra: nothing’s over till it’s over. Congress could change the details at any time. Tax pros are no doubt busy. As Tony Nitti pointed out in Forbes, the speed with which the TCJA was enacted will leave lots of loopholes. If you’re hoping to find some, talk to a professional.