As you may have heard, the new tax law passed.
If You’re a Homeowner Who is Staying Put
You can still deduct interest on up to $1 million of mortgage debt. You can also refinance your loan and retain this deduction limit, as long as the new loan amount is lower than your current balance.
You can still deduct home equity loan interest if proceeds are used to substantially improve the property. Otherwise, the deduction is repealed through the end of 2025.
There’s now a $10K cap on sales and property taxes. (Seattle Times reports that no, you can’t prepay your property taxes.)
Casualty losses are only deductible if associated with a presidentially-declared disaster.
Standard deductions have increased to $12K/$24K (for singles/joint filing couples), so many may longer be able to claim the above deductions by itemizing.
If You’re Thinking About Selling Your House
You can still exclude $250K/$500K (for singles/joint filing couples) of home sale profits from taxes if it’s been your primary residence for 2 out of the past 5 years. (Previous versions of the tax bill had proposed lengthening the residency requirement to 5 out of 8 years. This would have been extremely costly to new-ish homeowners needing to relocate.)
1031 exchanges remain in place if you’re an investor.
If you’ll be moving out of town after your sale, your relocation expenses are no longer tax deductible.
If You’re Thinking About Buying A House
You can only deduct interest on up on $750K in mortgage debt, down from $1 million previously. This limit will not be indexed for inflation going forward.
You can still deduct interest on second homes, subject to the $750K limit.
If you’re moving to Seattle from elsewhere for a job, your relocation expenses are no longer tax deductible.
What Will Be the Impact?
The Wall Street Journal says 23 million fewer households will be incentivized to buy houses. It cites Zillow’s estimate that only 14% of homeowners will now be able to take advantage of mortgage interest deduction (versus 44% previously), as well as Moody’s projection that US home prices will drop by 4% nationally and as much as 10% in pricier areas.
Curbed says this is because because mortgage interest and property tax deductions are baked into home prices. Reducing these benefits will inherently lower the values of affected homes.
The National Association of Realtors has an even grimmer view: only 5-8% of taxpayers will now be able to claim mortgage interest and property tax deductions. “There will be no tax differential between renting and owning for more than 90% of taxpayers”.
Update 12/22: Tim at Seattle Bubble does the math for two hypothetical couples, one near the cutoff point of the new standard deduction and the other whose home loan is just over the $750K mortgage interest deduction limit. He concludes that while those purchasing homes costing less than $500K or over $1.25M may see some tax impact, it’s doubtful that potential buyers will walk away in droves over a couple thousand dollars of lost tax savings.
I’m not sure I agree, because in addition to these lost savings, interest rates and property taxes are both rising. Faced with this triple whammy, the same $500K or $1.25M house will cost the same buyer much more next year, forcing many to reduce their home shopping price range. I think price growth will slow, but by how much I don’t know.