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A Quick Look At Tax Reform & What Could Impact Homeowners Most
1. Cap on Mortgage Interest Deduction
The Tax Cuts and Jobs Act reduced the limit for the mortgage interest rate deduction for new loans starting Dec. 15 to $750,000. Loans that were taken out before this date are grandfathered into the previous tax policy, which featured a $1 million cap on the deduction. Homeowners can refinance their existing mortgage balance up to $1 million while still being able to deduct the interest. The new loan cannot exceed the amount of debt being refinanced.
2. New SALT Deduction Limit
In the final bill, taxpayers can itemize deductions up to $10,000 for their total state and local property taxes and income or sales taxes. The cap is the same for both individual and married filers.
3. Preserved Exclusion of Capital Gains
This tax policy remains unchanged from the previous law, which stated that homeowners must live in their home for two out of the past five years in order to qualify for the exclusion.
4. Deductibility on Home Equity Loans
The new law states that taxpayers will no longer be able to deduct interest paid on home equity loans beginning in 2018, unless the funds are being used to significantly improve the residence. This provision expires in 2026, when it reverts back to the previous cap of $100,000 of home equity debt.
5. Doubling of the Standard Deduction
In the previous law, the standard deduction for single taxpayers and married couples filing jointly was $6,350. This amount is nearly doubled in the new law to $12,000. For married couples filing jointly, the previous standard deduction was $12,700, which has been increased to $24,000.
Location and Timing
The impact, however, will largely be based on where taxpayers are located. Those in high cost states may see the biggest changes in how they file, especially with the new $10,000 SALT limit. According to NAR research, here are the five metro areas that will be most affected by the new tax law, based on homes with mortgages valued over $750,000. They are San Jose Sunnyvale Santa Clara, Calif., San Francisco Oakland Hayward, Calif., Santa Cruz Watsonville, Calif., Santa Maria Santa Barbara, Calif., and Urban Honolulu, Hawaii.
"The tax bill decreases homeownership incentives, but these benefits are not the only factors in the homeownership decision," says realtor.com Senior Economist Joseph Kirchner, Ph.D. "In the short run, homebuyers can look forward to more money in their pocket that can be used for a down payment or larger home." He adds that cuts in government services and economic development programs, along with the rescinding of tax cuts for individuals in a few years and the impact of tax reform-induced deficit on inflation, will weaken the impact of the after tax income boost on homeownership.
According to an NAR statement, "As a result of the changes made throughout the legislative process, NAR is now projecting slower growth in home prices of 1 to 3 percent in 2018 as low inventories continue to spur price gains. However, some local markets, particularly in high cost, higher tax areas, will likely see price declines as a result of the legislation's new restrictions on mortgage interest and state and local taxes."
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