Tax Reform and Homeownership
By Charlie Ostlund, Ed.D., Realtor, MRS, SRS, ABR
I would like to be clear that this article is in no way intended to suggest any definitive advice or potential outcomes regarding the 2018 Tax Cuts and Jobs Act (TCJA); but to simply present a personal opinion based on the consensus of expert opinions regarding the likely impact on real estate emanating from the newly enacted TCJA.
Homeownership is the foundation of the “American Dream”; the defining aspect of being part of the middle-class. Just what impact is the new TCJA likely to have on this culturally significant aspect of American society? According to Moody’s Analytics, the law’s increase of the standard deduction will likely result in an additional 38 million Americans switching from itemizing deductions to selecting the newly doubled standard deduction. The home mortgage interest deduction dates back to the original Federal Income Tax Law of 1913, and while historically has not universally benefited all homeowners, does benefit the majority of home owners who elect to itemize deductions on their taxes.
Many have argued that changing this “homeowner benefit” was overdue and would recoup billions in lost revenue. Although the mortgage deduction has not been eliminated, the total mortgage(s) eligible was reduced from $1 million to $750,000. Also gone are deductions for HELOCs (Home Equity Lines of Credit). Of equal importance is the new limitation on SALT (State and local) taxes of a total of $10,000. The National Association of Realtors predicts that in high tax states that there could be up to a 10% drop in home prices in these states. So clearly for many potential homebuyers, particularly millennials, the question of “to rent or to buy?” has shifted to rent for most, which will continue to drive rising rental prices.
What did remain, that has particular importance to recreational communities like Lake of the Woods, is the mortgage deduction for a 2nd home. The limitation, of course, is the $750K total mortgages cap. According to Zillow for 44 million homeowners, itemizing their home interest deductions makes sense under the current tax law. They expect that will change for nearly 15 million of those homeowners. Clearly since many of the potential 2nd home purchasers come from the Washington DC area where current home prices result in high mortgages, what remains to be seen is whether the new mortgage deduction limits will affect the market for 2nd homes in Lake of the Woods.
Given the incredible volatility of the Stock market over the past week, perhaps the biggest question centers on what will happen to interest rates as the economy continues to heat up, as fears of demand-pull inflation increases. From a historical perspective, the low interest rates have been around for over a decade, and under 4% for a 30-year mortgage since 2012. Even if rates continue their gradual increase, it is likely that interest rates will not keep potential buyers from purchasing a home and we could continue to see rising prices, albeit marginal increases.
As suggested in the last post low existing inventory of homes in most markets may negate, and in the short-term increase both demand and home prices, despite limitations on interest deductions or rising interest rates. Hopefully that will be the case as for most the American Dream of home ownership is a powerful motivator and the market at Lake of the Woods and the greater Fredericksburg area will see a strong 2018 for sellers, buyers and the real estate industry in general.