Reader Question: We now have the Tax Cuts and Jobs Act. We are considering changing homes. This move would not job related, or created by any lifestyle changes; we just want a change. What has changed regarding homeownership as a result of the new tax bill that may affect us making this move?
Monty’s Answer: Your answer is not a one-size-fits-all answer. According to Forbes Magazine, “How exactly the tax overhaul will affect you and your housing options will depend on where you live, how much you spent (or can spend) on your home and how much the bill decreases (or increases) your overall tax burden.” The National Association of Realtors (NAR), says “The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, many will.”
The impact on housing
- The capital gain exclusion of $250,000 for a single person’s residence and a $500,000 exclusion for certain married couples remain intact. The homeowners must have lived in the home two of the past five years.
- Mortgage interest remains an itemized deduction up to $750,000. In the old law, the cap was $1 million. An existing mortgage grandfathered the $1 million cap. If you have a current loan above the cap and you move, you may want to keep your new loan under the $750,000 maximum.
- The interest deduction for home equity loans has been repealed, including existing home equity loans, unless the proceeds were used to make improvements to your home. Interest on second homes remains deductible up to the $750,000 cap.
- The new law caps the itemized deduction for state and local property taxes and incomes and sales taxes at $10,000 for married couples and single homeowners alike. The standard deduction increases to $12,000 for single taxpayers and $24,000 for married taxpayers filing a joint return. At the same time the personal exemption of $4,150 for the taxpayer, and his or her spouse, plus each dependent was repealed, which appears to offset the increases in the standard deduction for many taxpayers.
- The bill eliminates moving expense deductions that qualified in the past except for members of the military.
- The like-kind 1031 exchange has been retained for real property, but repealed for personal property, such as art, heavy equipment, or other none real estate assets.
What does the future hold with these changes?
What the new tax law does that could impact the market is that it levels the playing field between renters and homeowners. Some pundits believe this will increase the number of people who choose to rent over homeownership. With the caps on the itemized deductions for state and local property tax, residents in high tax states will bear an additional tax burden. Some states are already scrambling to find ways to reduce the shock of an impending tax bill for their high-income taxpayers.
It has been my experience that many of the approximately eight to ten million annual consumer real estate transactions take place without regard to tax law. The most prevalent reasons that people sell homes are sometimes referred to “DDT” in real estate circles. Death, divorce, and transfer are not lifestyles changes that consider the effect of taxes.
In the real estate markets where I have had direct experience, our customers and clients were buying and selling homes for reasons that had little to do with the tax impact of their decisions. I am not saying it was not a consideration, but only that taxes in the past have not driven the American dream. People buy homes for stability, to establish traditions, as a sense of accomplishment, for control, and as a safe place they can retreat in a busy and hectic world.
These provisions are set to expire in 2026 unless new legislation is passed that change the expiration date. For accurate advice regarding how the Tax and Job Act will affect your situation a consultation with your tax counsel may be the best solution.
Time will tell
There are a variety of theories that have been put forth regarding the future impact of these changes in the tax code on consumers, our governments, and the economy. Here is a link to some NAR before and after examples at http://bit.ly/2Gpg64n. It will be interesting to watch for any impact these changes bring to homeownership.