New federal tax legislation promises to have an unsettling effect on the housing market in our region. It will impact homeowners’ decisions to sell or to remain in their homes, buyers’ decisions to buy or to rent, and buyers’ choice of locations in which to buy or to rent. Inability to deduct state and local income taxes and property taxes in excess of $10,000, partial loss of deductibility of mortgage interest dollars for some prospective homebuyers and loss of deductibility of interest on home equity loans and HELOCs will raise the cost of homeownership. The effects will vary depending upon each taxpayer’s individual situation so that some homeowners and homebuyers will experience few or no ill effects. Companies such as Amazon, who will employ many thousands of people, will consider employees’ needs, including affordability and availability of housing, as these companies decide where to locate their businesses.
For those who itemize their deductions, the new tax law’s cap of $10,000 on the cumulative deductibility of state and local real property taxes and/or state and local income taxes and/or state and local sales taxes is significantly hurtful because those amounts exceeding $10,000 that would have been deducted under the previous tax laws are now non-deductible and are therefore now taxed by the federal government. Many people in the Jewish Link’s distribution area own homes with property taxes well in excess of $10,000 and pay state and local income taxes as well.
For those who have home mortgages, deductibility prior to the changes in the tax code was allowed for interest on principal loan amounts of up to $1 million; interest on home equity loans of up to $100,000 was also deductible, for a total of $1,100,000. Now, interest on any mortgage loans beginning after December 15, 2017 in excess of $750,000 will not be deductible nor will any interest on home equity and HELOC (home equity line of credit) loans. (But if you can just be patient and wait until 2026 to buy an expensive home with a larger mortgage, the rules on interest deductibility will revert to the previous $1 million plus $100,000, unless there is new legislation.)
The reason that home equity loan interest and HELOC interest is no longer deductible after 12/15/17 is because the new rule is that only interest related to “acquisition indebtedness” will be deductible. That is, only debt for acquiring, constructing or substantially improving a qualified residence may be deducted. So, for “acquisition indebtedness” after 12/15/17, only interest on the first $750,000 of the loan will be deductible (only $375,000 if married filing separately). For loans on or before 12/15/17, the old rule of $1 million, or $500,000 if married filing separately, will still apply.
What is the individual homeowner to do? In New York State, prepayment of 2018 real property taxes in December 2017 (and therefore deductible on the 2017 federal tax return) was allowed, but with a significant catch: These taxes will be deductible only if the taxing municipality assessed the tax prior to 2018! Thus, a prepayment of anticipated real property taxes that have not been assessed prior to 2018 is not deductible. State and local laws that determine if and when a real property tax is assessed state it generally occurs when the property owner becomes liable for the tax. For example, in my case, my town and village in upstate New York immediately assessed the 2018 property taxes in December 2017 and I immediately paid them, thus enabling me to deduct them on the 2017 return. However, as our school tax is not assessed until September 2018, I could not prepay that tax.
What could be the impact of all of the above on our area? Clearly, the new rules are designed to have the greatest effect on the most expensive home markets. It is predicted by Moody’s Analytics, for example, that home prices nationwide will drop by only 4 percent while East and West Coast cities will experience “heavy drops.” Other predictions are that New York, New Jersey, Connecticut, Chicago, Maryland and the West Coast will feel a greater impact than most other places.
Most American homes are worth less than $750,000, so new buyers who need less than a $750,000 mortgage loan will not be affected regarding the deductibility of their loan interest. However, any loan interest plus real property taxes plus state and local income taxes have a good chance of exceeding the $10,000 deductibility cap in our area. People who need more than a $750,000 loan will either accept the partial loss of interest deductibility, come up with a larger down payment or buy a less expensive home. The National Association of Realtors does predict that lower mortgage interest deductions could result in a drop in home prices. If you own an expensive home and you can’t itemize your entire real property taxes and state and local income taxes, the value of your house might drop and you will have a higher tax bill. Lower mortgage interest deductions could also cause current homeowners with large loans to decide not to sell because they benefit from the current mortgage deductibility rules and would lose under the new rules. And in what could be an overreaction, the National Association of Realtors opines that the new tax law effectively eliminates the tax incentive to buy an expensive home.
The other side of the coin may be that as home prices fall (perhaps as much as 10 percent in New York and New Jersey, according to Moody’s), in theory more people will be able to afford to buy homes. However, if more homes are worth less, then property tax assessments could decline, causing tax revenues to decline, impacting government services and making an area less attractive to new homebuyers—unless municipalities raise tax rates in order to maintain current revenue streams.
People in less expensive homes who had thought of trading up may decide to remain where they are. This will decrease the number of affordable homes coming on the market, creating a scarcity situation. Economics 101: Scarcity of supply coupled with increasing demand raises prices!
Will employers decide to relocate or to remain in high-tax states with expensive homes if their employees can’t find affordable housing? Will there be enough rental housing if employees can’t buy? Will companies like Amazon not choose New York or Newark for this reason? Our area needs new jobs and the sales and property tax revenue that the jobs bring with them.
And what impact might the tax law changes have on homeowners who are at transitional points in their lives? For example, what about retired people, or people contemplating retirement on soon-to-be-reduced incomes? Many people count on the value of their homes as significant assets. Will these people be forced to sell into a declining market and see the quality of life in their retirement impacted?
Bottom line: Assess your situation, consult your tax and financial advisors and don’t panic. The passage of time, more than educated guesses and speculation, will reveal the actual impact of the tax code changes.
By Vivian J. Oleen