The new tax bill that was passed by Congress in December 2017, celebrated as the Trump Administration’s first major legislative victory, will have inadvertent consequences for potential homebuyers looking to buy homes in high-end markets, and those with existing HELOCs. A decrease in home prices and caps on tax deductions, among other effects, will lower affordability in some high-tax states.
The GOP tax bill, which includes a $1.5 trillion tax cut, lowers tax rates for individuals and corporations, drops the mortgage interest deduction to $750,000, doubles the standard deduction, as well as child tax credit. Individuals looking to buy a home in the near future, especially in the Northeast, West Coast and South Florida, will be affected by these changes.
Starting this year, homeowners will face new limitations on mortgage and tax deductions. They will have to adjust to a new cap on how much interest they can deduct on mortgages, a steep decline from the previous cap of $1 million. Furthermore, interest on home equity loans and lines of credit will not be deductible. Homeowners will also have a $10,000 cap on how much they can deduct from their state and local taxes.
Homebuyers in High-End Markets
Since about 95 percent of homeowners are positioned below this amount, and not many homeowners have mortgages of such large proportions, these changes will be felt in a small section of the market. While the middle states with affordable housing will be largely unaffected by these laws, more people in states with high taxes, including New York, Maryland, Connecticut and California, will deal directly with these alterations.
For instance, 20 percent of homebuyers in New York pay more than $10,000 for just property taxes. These tax reforms might make living in California even more unaffordable, as a lack of affordable housing has decreased the homeownership rate.
Limits on HELOC Deductibility
Homeowners that have a home equity line-of-credit (HELOC) might not be able to take tax deductions depending on the loan’s purpose. HELOCs used for acquisition, or home improvement, will be deductible, while those used for debt consolidation, a common practice, will not. Starting in 2019, homeowners will have a greater incentive to pay off their debt, if possible, or will have to roll their HELOCs into a deductible first mortgage.
While new tax reform might cause a fall in property values, and make it difficult for homebuyers to afford housing in diverse cities with more employment opportunities, experts see possible long-terms benefits. These include subsidized house prices, an increase in home buying and economic growth in the housing industry.