It’s been nine months since big new changes to the tax law were implemented, but the effects on the housing market in particular haven’t yet manifested. Why? There were three different changes to tax deductions that are tied to housing and homeownership, and those three changes are going to affect different homeowners and investors with different assets in different parts of the country in different ways.
Tax profiles are nearly as unique as the individuals who file taxes, and a change to the tax law that might have adversely influenced one taxpayer will be beneficial to another. To state conclusively that the changes to the tax law are good, bad, or in-between can be difficult for that reason — but if you understand the changes and where they’re going to have the biggest impact, then you can assess for yourself how the new tax laws might affect you, your neighbors, or your clients.
The three changes that affect homeownership surround the mortgage interest deduction (MID), the state and local tax (SALT) deduction, and the home equity loan interest deduction.
- The MID cap has been lowered from $1 million to $750,000. Homeowners can deduct the mortgage interest paid on their home loans (including loans for second homes) up to the cap, so this change affects homeowners who took out home loans for more than $750,000 — they won’t be able to deduct all of that loan interest when they file their taxes.
- SALT includes state and local property taxes in addition to income and sales taxes, and it varies from state to state and even county to county. The SALT deduction has been capped at up to $10,000 per taxpayer, when before there was no limit to the amount of SALT you could deduct. Many taxpayers don’t pay nearly that much in SALT, but there are several counties where this SALT deduction cap will affect taxpayers (including homeowners).
- Home equity loan and home equity line of credit (HELOC) interest is no longer tax deductible if that loan or line of credit is being used for anything except improving a home or acquiring a home. So taking out a home equity loan or HELOC to pay off student loan or credit card debt will prohibit taxpayers from deducting that loan or line-of-credit interest on their taxes … but using that loan or line of credit for a home-related need is typically permissible.
Most Americans will likely see a lower tax bill when they file their 2018 taxes next April — but some will see substantially higher bills. A lot depends on where you live, especially regarding MID and SALT deductions.
Homes that cost more than $750,000 and range up to $1 million are considered high-end in many (if not most) markets. The average home price in the United States was approximately $300,000 at the end of 2017, according to HouseCanary’s proprietary models, which is clearly far below the range that will be heavily affected by this tweak to the MID.
However, there are some markets where a million-dollar home is considered a mid-level purchase. In those markets, lowering the affordability of homes ranging between $750,000 and $1 million could have an effect on the buyers who are able to secure a loan for those homes.
We examined 2017 loans that fell between $750,000 and $1 million, originated by metropolitan statistical area (MSA) to see how many homes would be affected by this new law, estimating a 1-percent financing benefit and shaving 25 percent from deductions on a 4-percent mortgage loan. We found 10 MSAs that together encompass 82 percent of the lost MID benefit. Four of them are in California, and all of them were struggling with affordability issues prior to the tax law changes.
All that said: Buyers at these price points who could lose up to $2,235 in annual tax benefits (as in Phoenix-Mesa-Scottsdale, Arizona, for example) will probably not find that loss a significant deterrent to homeownership. It’s a comparative drop in the bucket, so to speak. But the increased MID could influence buyers in some of those markets to reassess their spending levels or opt out of the market altogether if median home prices continue to climb.
State and local taxes (SALTs) vary from state to state and county to county. SALT encompasses property taxes, too, which is typically based on a home’s value. Taxpayers can deduct their SALT payments on their annual taxes, but that deduction has been capped to $10,000 per taxpayer. So this is another tweak to the tax law that will likely disproportionately affect people in areas with higher-than-average home values.
We looked at median household incomes, state income tax rates, median valuations (calculated as the median automated valuation for each MSA), and local property tax rates to figure out which parts of the country contain average taxpayers who pay more than $10,000 every year in SALT.
As we can see, most counties will see little or no change in terms of SALT deductions, but 66 of 3,134 counties in the country have high SALT rates and will most definitely be affected. Depending on the individual taxpayer’s finances and profile, it might be profitable to pick up and move to a neighboring county or even state where the SALT isn’t quite so heavy.
The tax law changes that affect homeownership will have the biggest impact in parts of the country where citizens are already used to increased expenses — like the San Francisco Bay Area or New York City. It’s difficult to determine at this time whether paying a few extra thousand dollars a year in taxes will cause ripple effects in those cities, which are already unaffordable for many would-be homeowners, or whether that extra tax burden will be relatively insignificant compared to the many benefits of living in or near those major metropolitan areas.
One ripple effect that will likely continue in those MSAs where MID and SALT have a big impact is the boost to home prices in areas surrounding that MSA. As housing becomes more expensive in the city center, the suburbs become increasingly attractive to people who want to purchase homes, driving up prices in the neighborhoods and suburbs most conveniently located to the city center. And as those prices rise, farther-flung neighborhoods and suburbs become new targets for entry-level homeowners and investors.