The Impact of the GOP’s New Tax Plan on Homeowners

UPDATED 12/21/2017

First and foremost, with changes like this consult your tax advisor. The bill has changed several times from inception to signing, so we’re still reviewing potential impacts on housing. One of the biggest changes for many taxpayers will be change in the standard deduction.  The tax plan cuts home-mortgage-interest deductions and increases the standard deduction. Currently, homeowners can claim a tax deduction for interest paid on their mortgages up to $1 million, but the new plan reduces that limit to $750K. However, it’s important to note that this limit only applies to NEW mortgage debt (not refinancing) incurred after Nov. 2, 2017. This provision particularly impacts middle-class homeowners and those purchasing homes in high-cost markets. Also, mortgage interest deduction is potentially changing in 2018 for second home purchases. The cut off to have a second home that could qualify was Dec. 15, 2017. Homes bought before that time are grandfathered in and could continue to qualify for the mortgage interest deduction

“Though the Birmingham market has many high-value homes, it is not considered a high-cost market in comparison to places like New York or California,” noted Method Mortgage Managing Partner, Craig Tindall. “According to the ACRE research for the Birmingham area, the average sales price in 2016 was just over $222,000, which is well below the new threshold.”

Secondly, the tax plan places new restrictions on the capital gains exemption homeowners often use when selling their homes. The new rule would require homeowners to own their home for 5-8 years, rather than 2-5 years, before selling to qualify for exemption. So, if you purchase a home and decide to sell within 5 years, you may be hit with a large tax bill.

“While this could definitely impact the rate at which homes turn over, homebuyers should remember that it is on the capital gain,” emphasized Method Mortgage Partner Roger Steur. “I would recommend that homeowners keep a file on all expenses associated with purchasing and selling the home, including improvements, updates, etc. to minimize the gain. If you meet the new requirements, the individual and married lifetime exemptions are $250,000 and $500,000.”

Likewise, Method Mortgage Partner Adam Stoffregen pointed out, “The number of folks consistently moving every 2-5 years currently is just a small sampling of the overall homeowner population. Most homeowners are buying for equity, shelter, school systems and other reasons.”

Lastly, the NAR predicts that the tax plan will cause home values to fall because it eliminates the appeal of homeownership. Without attractive tax deductibles and exemptions, purchasing a home becomes less feasible and appealing to many individuals. Consequently, the housing market will take a hit if the tax plan is passed.

On the other hand, Stoffregen believes home prices will continue to remain stable and increasing. He said, “When you compare renting vs. a mortgage at the same monthly amount, the benefits of homeownership will still outweigh renting. For instance, for most homeowners, some, if not all, of the property taxes and mortgage interest will still be deductible.  Plus, within your monthly payment, you are paying down your principal balance, which is growing equity in the property.”

All in all, though the GOP’s proposed tax plan changes homeownership tax incentives for some individuals, the core reasons and goal of home ownership will remain the same—to provide a safe home, build equity to grow wealth and become a part of a community.