This article appears in Real Estate Outlook 2018.
It may take a while before the implications of The Tax Cuts and Jobs Act, enacted in December 2017, are entirely clear, but it will affect the real estate market.
“Given the increase in the standard deduction and the decrease in the amount of debt covered by the mortgage interest deduction, there will be fewer home buyers moving forward. Expect the housing market to be soft for the next few years as a result,” said Gabriel Mathy, assistant professor in the Department of Economics at American University, Washington, D.C.
The lower mortgage interest deduction may keep some buyers from purchasing a new home.
“Anyone borrowing a large amount to buy a home will pay more in taxes and this will discourage some buyers, who will rent instead,” Mathy said.
High-end market hit
The new tax bill lowers the amount of interest on mortgage debt, and that will affect home buyers in more-expensive markets, said Joshua Zimmelman, president of Westwood Tax & Consulting, Rockville Center, New York.
“In the past, taxpayers could deduct interest on mortgage loans up to $1 million. In the new tax plan, current homeowners can keep deducting up to $1 million, but new homeowners can only deduct up to $750,000 on homes,” Zimmelman said.
In particular buyers will take a hit in certain luxury markets like Manhattan and San Francisco, where the median home price is well over $750,000, said Meisa Bonelli, senior tax professional with Millennial Tax, a provider of preparation and education for solopreneurs, freelancers and microbusinesses in New York City.
“Forty percent of American homeowners, if they had to sell their homes tomorrow, would have to consider how their prospective buyers would be affected by the new mortgage interest deduction cap,” Bonelli said. “The best thing may be for sellers to require larger down payments up front to weed out buyers that may be factoring in the mortgage interest deduction per a home’s sale price.”
SALT cap of $10,000
The new tax plan caps state and local tax deductions at $10,000, plus the income or sales tax.
“The state and local property tax cap may stop people from moving to higher-tax areas. It’s possible this could make the value of homes in those areas go down, while increasing the prices of homes in more-affordable areas,” Zimmelman said.
Additionally, in areas with local and state taxes that are higher than average, “home values could start to decline as a result of the new tax plan. … After some time, the prices of homes in more-affordable areas could actually increase as a result,” Zimmelman said.
Sellers may hold off
The new tax bill also affects sellers because it eliminates the moving expenses deduction for most taxpayers.
“After 2018, only members of the armed forces on active duty can deduct moving expenses,” Zimmelman said.
It will also affect people who are planning to sell a property as retirement income.
“For people that have factored in selling their homes as part of their retirement portfolio, they should give themselves more time to sell their homes if the value of their home is 5 to 10 percent above $750,000. Why? Because most buyers today don’t put down the traditional 20 percent down payment to obtain their mortgage,” Bonelli said.
Equity loans more expensive
Another change is that home equity loans are no longer deductible.
“In the past, taxpayers could deduct up to $100,000 in interest paid on home equity debt. The new tax law eliminates this deduction unless the home equity line was used to purchase another home or for home renovations,” Zimmelman said.
“That may turn buyers off to fixer-upper properties,” Bonelli said. “Home equity loans had more advantage than 203k (FHA) loans in the past because they were cheaper to originate. Now, it may make sense for buyers to look for rehabilitation properties if they can get 203k financing because if the mortgage is under $750,000, the interest will be tax-deductible.”