2017 Tax Reform
Thanks to KCM
1. Mortgage Interest Deduction
There was concern that the mortgage interest deduction (MID) would be eliminated. That didn’t happen.
However, the bill has made the following changes:
- Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17 (from the existing $1,000,000). Current loans up to $1 million are grandfathered.
- Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount refinanced.
- Repeals deduction for interest paid on home equity debt through 12/31/25.
- Interest is still deductible on home equity loans if proceeds are used to substantially improve the residence.
- Interest remains deductible on second homes, but subject to the limits.
2. State and Local Taxes (SALT)
There was concern that the state and local tax deduction (which includes property taxes) would be eliminated. That didn’t happen. The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes.
3. Exclusion of gain on sale of a principal residence
There was concern that owners would now need to live in their house for at least 5 out of the last 8 years to claim this exemption. Under the former tax framework, a typical owner, who has lived in their house for at least 2 years out of the last 5 years, would pay nothing in capital gain taxes if they sell the house. No change. The new code will remain the same as the old.
_______________________________________________________
The most thorough analysis of how tax reform will affect the housing market has come from Capital Economics. Here are some highlights:
- The tax bill could raise the net costs of buying. But, given most households will see an overall tax cut, and potential buyers are likely to put that saving towards their home, we doubt it will have a significant detrimental impact on the housing market.
- Most households stretch themselves when buying a home, and to the extent that the new code will cut taxes for most households, the overall change could be positive for the housing market.
- The impact on expensive homes could be more detrimental, with a limit on the mortgage interest deduction raising taxes for those that itemize.
Here is their full analysis (7 pages): US HOUSING MARKET FOCUS: Buying still better than renting in the long run
_______________________________________________________
Calculated Risk‘s Bill McBride weighed in on the subject. Here are some highlights:
- The impact of reducing the MID from a maximum of $1 million in mortgage debt to $750 thousand in mortgage debt will have very little impact on the housing market.
- State and local taxes (SALT) will have an impact on housing in some areas. Some people might choose to live in one state over another (if they have a choice), based on taxation. This could impact demand in certain states – especially for the middle and upper-middle class homeowners.
- The corporate tax cuts (and other tax cuts) will mostly benefit the wealthy, and this will be a positive for high end real estate.
- There will be some negative impact based on SALT, but overall the impact of these policy changes on housing will be minimal.
Here is his full analysis: A few comments: Housing and Policy
____________________________________________________
Mark Zandi of Moody’s Analytics had a more negative opinion. Here are the highlights:
- House prices suffer under the tax plan. The tax law changes significantly reduce the value of the mortgage interest deduction, or MID, and property tax deductions, which are capitalized in current house prices.
- Higher mortgage rates that result from the higher budget deficits and debt under the plans will weaken housing demand.
- The hit to national house prices is estimated to be near 4% at the peak of their impact in summer 2019. That is, national house prices will be approximately 4% lower than they would have been if there were no tax legislation.
- The impact on house prices is much greater for higher-priced homes, especially in parts of the country where incomes are higher and there are thus a disproportionate number of itemizers, and where homeowners have big mortgages and property tax bills.
- The impact on the broader national economy of the higher stock prices and lower house prices is largely a wash.
______________________________________________________
How Tax Reform Impacts Homeowners in Each State
This site, run by NAR, hopefully will be updated now that the tax reform bill has become law. It gives you state-by-state data on tax deductions, capital gains exemptions, and the potential impact on housing prices from the 2017 tax reform framework. You can download information for your state by clicking their map.
This site, run by NAR, hopefully will be updated now that the tax reform bill has become law. It gives you state-by-state data on tax deductions, capital gains exemptions, and the potential impact on housing prices from the 2017 tax reform framework. You can download information for your state by clicking their map.
Which Places Pay the Most in Property Taxes?
This site gives you an interactive map where you can find the median property taxes by county.
This site gives you an interactive map where you can find the median property taxes by county.
Reforming the mortgage interest deduction: A chance for fairness for American taxpayers?
This article gives the argument for why the changes made sense. We are not saying we agree so please don’t attack us for the content. We just want you to better understand the other side, so you are prepared for those conversations.
This article gives the argument for why the changes made sense. We are not saying we agree so please don’t attack us for the content. We just want you to better understand the other side, so you are prepared for those conversations.
And remember…
Some people will overreact to any change. In the current political environment, reactions from both sides may be even more passionate.
In the end, Jason Furman, a Harvard Kennedy School economist, may be proven correct:
“Nothing in my experience suggests that the views people have about the tax cuts – whether justified or not – will change after they start actually being affected by them.”
It is our job to remain objective and report the facts. As we say at KCM:
“It’s not good news. It’s not bad news. I’m just reporting THE news.”
