The New Tax Bill – What Does It Mean for Homeowners?
In case you missed it, the hotly-debated new tax bill has officially passed. Since real estate is one of the key areas of change in the bill, everyone is asking us, “What does the new tax bill mean for me? Is this good news or bad news for DC area buyers and sellers?” The answer, as it so often is in real estate is, “it depends!’
We’ll be honest – the initial version of this new tax bill would have been troublesome for real estate values in our area. It slashed the mortgage deduction in half, had big changes for capital gains, and made it much more expensive to move. Several changes were made between the initial draft and the final form, which makes the final impact of the bill more of a mixed bag.
So without further ado, here are the main changes and takeaways affecting homeowners in our area.
THE DEDUCTION FOR MORTGAGE INTEREST
THE CHANGE: Through the end of 2025, NEW homebuyers will only be able to deduct interest on the first $750,000 of a mortgage (down from $1 million). In 2026, the deduction cap will revert to $1 million in loan value. Existing mortgages will be unaffected.
THE IMPACT: No real impact for existing homeowners or new buyers with loan amounts under $750,000. While this reduction is bad news for upper price point buyers, the news is much better than the original proposal, which was a reduction to $500,000 and would have affected the majority of mortgages in our area. Remember, these are loan amounts – NOT sales prices. Thus, the only impact will be for buyers with loans above $750,000 – which most often is homes above $825,000 – depending on how much the buyer is financing. While it is possible the bill could cause a small slowdown for “move-up” buyers in our market, we don’t anticipate this causing a major change now. The impact of the new cap will probably make it less attractive to refinance in upper brackets. If your loan existed before December 15, 2017 up to $1,00,000 can still deduct the interest as long as the new loan does not exceed the amount refinanced.
Let’s look at Buyers A & B to see how this new cap comes into play.
Buyer A is putting 10% down on a sales price of $825,000, meaning he has a loan of $750,000 which is the deduction limit. Buyer A would be unaffected.
Buyer B is putting 10% down on $1,000,000, which is a loan amount of $900,000. The deduction can still be taken, but can only be taken on the first $750,000. Buyer B would not be able to deduct the interest paid on $150,000 of the loan (the difference between $750K-$900K).
THE DEDUCTION FOR HOME EQUITY LOAN INTEREST
THE CHANGE: The new tax bill also suspends the deduction for interest on home equity loans until 2026 – with no grandfathering. Which means if you already have a home-equity loan, 2017 is the last year you can write off the interest paid on it (for a while – in 2026, this provision will revert to the old law of allowable deductions up to $100,000). Caveat – the interest on a home-equity loan can be deducted if the proceeds are used to substantially improve the home.
THE IMPACT: This change makes it less attractive for homeowners to take out equity lines on their homes in order to do minor renovations or use their home’s equity to pay for other things like kids’ college tuition or other big purchases. While this change is certainly frustrating for those planning to take advantage of these loans, it shouldn’t affect the housing market in a significant way since it is typically utilized by homeowners who have been in their properties for several years (and have equity) and are planning to stay longer to regain the equity over time. As long as renovations are substantial, the change does not have an impact and will not make it less attractive for homeowners to utilize equity lines.
THE DEDUCTION FOR MORTGAGE INTEREST ON A SECOND HOME
THE CHANGE: The interest deduction on loans for a second home will still be allowed. However, homeowners can only deduct the first $750,000 of interest on the combined value of loans on their first and second homes, but only for new homes.
THE IMPACT: New buyers of multiple properties will feel this one. The bad news is there is likely to be a large impact on housing markets in resort or second home areas, as it will certainly be more expensive to own more than one property. While we are not a second home market, we have many clients buying properties in our area to be near their kids and grandkids. Similarly, many service members who take advantage of their housing allowance and low downpayment opportunities with VA loans to keep their homes in other areas while buying a home when they are stationed here in the DC area. The impact of this change remains to be seen. This will not affect existing mortgages, only new loans.
THE “SALT” DEDUCTION FOR STATE & LOCAL PROPERTY TAX
THE CHANGE: Individuals can only deduct up to $10,000 in state and local income and property taxes or state and local property and sales taxes. Previously, there was no cap on this deduction.
THE IMPACT: Homeowners living in high property tax states (like New Jersey with an average rate of 2.38%) will likely see an increased tax bill come April. Nationally, ATTOM Data Solutions estimates that 4.1 million Americans pay more than $10,000 in property taxes so it will affect many Americans. Locally, average property tax rates are more reasonable (Maryland is 1.1% which is #22 nationally, Virginia is .78% which ranks #37 nationally and DC is .57% bringing up the rear at #46 nationally), so it should have less of an impact here than it does in some of the higher-taxed states (click here to see how your state ranks). That being said, it will definitely still have an impact since it is a cap on all state and local taxes. A high number of owners in the NOVA area will find their total SALT deduction limited.
THE DEDUCTIONS FOR WORK-RELATED MOVING EXPENSES
THE CHANGE: Reasonable moving expenses for work-related relocations are no longer deductible – with the exception of those in the military.
THE IMPACT: While it is possible that fewer people will want to move due to this deduction, generally these types of moves come with increased salaries and opportunity, so we don’t anticipate big changes to the market because of this change.
NO CHANGE. Despite some back and forth, the deduction for up to $500,000 in capital gains (or $250,000 for single filers) from selling a primary home remains (so as long as it has been the primary residence for two of the last five years). This is a big win, as previous versions of the bill sought to make the tenure requirements five of the last eight years as the primary residence.
SO, WHAT DOES THE NEW TAX BILL MEAN FOR HOMEOWNERS & HOUSE HUNTERS?
The good news is that many of the real estate changes in the new tax bill will have much less of an impact than previous versions of the bill suggested. On the plus side, it’s possible that the impact of the lowered deduction could be offset by lower income taxes for these high-end home buyers, specifically business owners or those in “pass-through” businesses, which will see a tax deduction on their income. The bill is also positive for real estate investors – who are typically able to take advantage of that 20% pass through income deduction.
The bad news is we might see an impact in our “move up” market . We will carefully watch buyers’ reactions to the home mortgage deduction limit to $750,000, which could make “moving up” slightly more difficult in upper bracket price points (click here to download our comprehensive guide to “moving up”). This change is likely to have the biggest impact in our market. Nationally, we will may see a decrease in people buying vacation properties so resort areas will likely take a hit. We’ve read statistics that predict the changes could lower home values by 4%. We also may see less motivation for first time buyers to enter the market now that fewer people will be itemizing deductions. However, historically the tax incentive is not typically the biggest driver we see for first time buyers to enter the market. There is still something to that American Dream!
The bottom line? While there might be some slow down and a temporary dip in values while everyone comes to terms with the changes in the new tax bill, we don’t anticipate a significant long-term effect at this point. This is certainly a change from our perspective just a few short weeks ago when the bill was still in draft form.
We have been following this bill closely and know how impactful these changes are to your life. We’re here to help you through this complex process. If you are thinking of buying or selling and wondering what these changes might mean for you and your bottom line, please reach out. We are always happy to help!