Tax reform and home ownership in high-tax states like New York…

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January 25, 2018

Changes in the tax code, particularly with respect to the state and local tax deduction and the mortgage interest deduction are on everyone’s mind. These issues are of particular relevance to homeowners in high-tax states like New York. Now that tax reform is a done deal, it is important to look at the implications for homeowners.

I will not mince words on the issue. This bill takes direct aim at homeowners who live in or near major urban job hubs in roughly 10 states. These states and municipalities are known for their high tax rates. Previously, homeowners who itemized were able to fully deduct these taxes off of their federal income taxes. No more. This one issue (more than the lowering of the mortgage interest deduction) is going to impact many homeowners in our area.

Are my taxes going to rise?

Tax Reform - the mortgage interest deduction and SALT deduction and marginal ratesFirst, I am not an accountant. I don’t even play one on TV. Second, it depends. When it comes to taxes, everyone’s situation is unique. The best person to answer this question for you is your accountant. There is going to be a great deal of variance between individuals.The marginal tax rates have been reduced for most, so this will somewhat offset the lack of deductions.

The bottom line for many would-be home seller’s and home buyer’s is whether home ownership still make financial sense. The answer, in many cases is still yes.

What tax code changes have the biggest impact on home ownership or potential home owners? Let’s get a closer look by unpacking some of these changes.

Changes in the tax code that impact homeowners…

Traditionally, most homeowners itemize their deductions. Some of the changes outlined below are directly concerned with home ownership and itemization.  Other deductions or exemptions (like the personal exemption) have a significant impact on everyone. These will also impact renters who are would-be home buyers.

Marginal income tax rates have been reduced…

The marginal rates have been reduced temporarily for most tax filers. Whether you end up paying more or less in 2018 will largely end up being a tug-of-war between shrinking deductions and exemptions on one side and lower marginal rates on the other.  For your convenience, the infographic has tables for the new vs. old marginal tax rates for individuals and couples.

The mortgage interest deduction…

The mortgage interest deduction is capped at $750,000. Previously, it was capped at $1 million. The old cap has been grandfathered for current homeowners.

This basically takes away the ability to deduct the interest of up to $250,000 on high-end homes. The good news is that with a 20% down payment, that issue doesn’t begin to kick in until the sales price hits about $940k and about $840k for a 10% down payment. Another piece of good news is that current homeowners will not have sticker shock on this aspect of the tax bill. The bad news is that many homes in the New York area are well above these price points.

This may push people into more modest homes or to towns where comparable home prices are somewhat somewhat less. Since our recovery has been more than a little bit uneven in this regard, this could be good news for municipalities whose values have seen more modest gains that the areas that have been “on fire”.

The mortgage interest deduction on home equity loans has been eliminated…

Unlike the standard mortgage interest deduction, this one is not grandfathered for current homeowners. Home buyers often use this as a line of credit as well as a means to begin the inevitable renovations and personalization that generally comes with owning your own home. Not being able to deduct the interest from the loan may temper those plans. This may also put a damper on using a home equity line of credit in place for emergency expenses.

State and local tax deductions (also known as SALT deductions)  are capped at $10,000…

The state and local tax deduction (SALT)  used to have no limits. Unfortunately, this change has no phase-in.

For many living in low-tax states, this may not seem like a big deal. But in a highly taxed area with lots of infrastructure and some of the best public schools in the country, the impact will be significant. $20k+ property taxes are not uncommon, even on a modest home.

There is no way around it, this one is going to hurt almost anyone who itemizes. Already, Governor Cuomo and our state legislature is looking for work arounds to this issue. I just got an email from my state senator saying that Albany is looking for ways to shift the tax burden around so that some of the damage is blunted.

The biggest impact from this will be felt in towns with very high property taxes. It will also disproportionately impact larger homes at higher price points. This may influence where people choose to live. This is especially true in Westchester where the local property taxes are a like a crazy quilt with major differences even between adjacent towns.

Property ownership notwithstanding, those with higher incomes will have higher state income taxes. But this is an issue that will impact people whether they own a home or not.

The standard deduction will nearly double…

It was $6350 for individuals and $12,700 for couples  It is now $12,000 year for individuals and $24,000 for couples filing jointly. This increase might encourage some to take the standard deduction and would make renting more attractive than home ownership. But its impact is blunted by the loss of the personal exemption.

The personal exemption of $4050 is gone…

This is not strictly a homeowner issue. It impacts all taxpayers, whether they itemize or not.

That’s a big deduction and its loss is a blunt instrument that sharply limits the perceived benefits of the increase in the standard deduction and drop in marginal rates.

For example: a family with two children taking the 2017 standard deduction of $12,700 and four personal exemptions ($16,200) would loses $4900 in deductions under the new plan.

For homeowners who itemize and want to blame the end of the SALT deductions and the limit on the mortgage interest deduction for an increase in their taxes, need to take note that this exemption. Ending this exemption really packs a punch if you have a family. People who take the standard deduction have a significant increase in that deduction to help them. But if you itemize, the only thing that protects you losing this exemption is slightly lower marginal rates.

Homeowner snapshots are coming…

Over the next few weeks, we will be looking at snapshots of potential home seller’s and home buyers and look at how the new tax laws impact them. The primary objective will be to see whether home ownership still makes financial sense. Although the news is far from wonderful in a state, like New York, some of the numbers I have crunched have been surprising. For many, the answer is decided yes. For others, the answers are less clear.

Stay tuned for these snapshots, but be forewarned that once again – I am NOT an accountant and everyone’s taxes are different. These are general profiles that help build an overall picture for potential home buyers and sellers. No  more, no less.

Additional Reading:

How the new tax laws impact an inherited estate…

 

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