In 2017, the United States saw the most impactful change in tax laws since President Reagan. With the creation of the “Tax Cuts and Jobs Act,” things like tax brackets, deductions, and exemptions were completely altered. The brackets, per se, got pushed to help people avoid paying as much tax on their earned income. Similarly, the standard deduction got increased to compensate for the removal of the personal exemption. What a lot of people do not know, however, is that the tax law changes also impacted the housing market.
Unless one is a long-term real estate investor, they may not be familiar with all the tax implications of property transactions. These include far more than simple property tax rates and moving deductions. So, how exactly did the new tax code impact the housing market?
Reduced Mortgage Deduction Limit
In the past, homeowners were allowed to deduct interest on up to $1 million of debt used to buy a home. This means that married couples who took out mortgages going up to $1 million could deduct all of their interest on that debt. Doing so helped reduce taxes as this deduction almost always exceeded the standard deduction just by itself. Now, however, the most amount of debt that can be used to deduct interest on is $750,000. For those who are married filing separately, that deduction is only $375,000.
This indicates that the tax code reduced the amount of debt that is eligible for interest deduction by 25 percent. For homeowners, that means 25 percent less in deductions when the time for filing a tax return comes. Thus, if they used to take out $10,000 from their taxable income via mortgage interest, they will now only be allowed to take out $7,500. In the long-run, those numbers will impact homeowners as they will have to spend more on taxes. Consequently, the housing market may drag slightly as people work to compensate for this 25-percent loss.
In the past, taxpayers were allowed to deduct moving expenses in the form of an itemized deduction. This was done using a form numbered 3903, and it could add up to a substantial decrease in tax liability. As of 2018, however, it no longer applies to every taxpayer in the U.S.
Instead, this provision of the previous tax law was suspended until 2025 and only applies to military-related moving. Meaning, only those that are relocating as a consequence of their service to the armed forces will be eligible for the deduction. In turn, buying a home across the country may not be a light decision anymore, if it ever even was. People will now have to include moving expenses in the price of the home as they will not be getting any of those costs back.
Home Equity Debt Loan Deduction
Before the new tax code, those with large mortgages could treat $100,000 of their debt as home-acquisition debt. The only requirement in place was to use that amount of money for buying a new home or improving an old one. The old one, of course, had the be the first or the second residence that the taxpayer bought. If those conditions were met, people were allowed to deduct interest on that additional $100,000 as well. Although it was not as considerable as the deduction above the limit ($1 million) that was mentioned, it helped increase overall savings.
After 2017, however, this provision goes away as well. In translation, there will be no additional $100,000 that people can use to increase interest deductions. Thus, that could potentially put another strain on homebuyers who want to maximize tax relief.