Tax Cuts and Jobs Act: How The New Tax Bill Affects You In Real Estate

Toward the finish of December 2017, the Tax Cuts and Jobs Act became a real thing. Everyone's situation is different, so without talking to your tax preparer about your specific circumstances, it's hard to determine precisely how this bill will affect you. Having said that, here's a general run-down of how the recent changes could affect real estate this year.

Standard Deduction 

Standard deductions, regardless of whether you file joint, married, or single, will basically double. Because of this, many people will choose to take a standard deduction in lieu of itemized deductions. By default, fewer will be taking a mortgage interest deduction. Because of this, some analysts think we could see home prices drop.

A drop in home prices brings bad with the good. Buyers get more bang for their buck when home prices dip, but the downside is that there will be fewer homes on the market. Folks will be reluctant to list their homes until home values go back up. This type of situation could lead to a stagnant real estate market, or, it could eventually lead to a Seller's Market. Afterall, there are many other factors which contribute to the local market.

There are still some who believe many the real estate market is in a bubble. While we don't feel this is the case locally, dropping home prices nationally could lead to a collapse similar to the one which happened around 2009.

State and Local Tax Deduction Cap 

The new bill puts a $10,000 cap on the amount of state and local taxes you are able to deduct from your federal tax return. For a few people, this can be a monumental hit. For example, someone who might average $40,000 in state and local taxes can now only deduct a maximum of $10,000 of that amount from their federal taxes, where-as before they would have been able to deduct the full amount.

How does this apply to real estate? Well, in areas with a lower tax burden, this won't change much for the average citizen. Missouri happens to fall about #38 in overall tax burden compared to all the other states. Many people in our neck of the woods don't pay over $10,000 in state and local taxes. Individuals who will likely be most affected by this cap are going to be individuals and investors who own multiple properties. Consider, for a moment, that you own one owner-occupied residence and ten tenant-occupied properties. You are paying real estate taxes on eleven properties. In years past, you would have been able to deduct the full amount you paid in real estate taxes on all eleven properties. This year, that won't be the case. This year, you can't deduct more than $10,000 in local and state taxes from your federal taxes.

In areas with a higher tax burden, like New York and other coastal states, this could be a much bigger issue. The approximate property tax burden of New York is over 50% higher than that of Missouri. Housing in New York, New York is 492% more expensive than housing in St. Joseph, MO. If you lived in New York, New York maybe you'd consider renting, rather than owning your home, because the loss in federal tax deduction due to this cap outweighs the benefit of owning your own home.

Mortgage Deductions

Previously, mortgage interest could be deducted on mortgages up to $1 million. Under the new bill, interest can now be deducted on mortgages only up to $750,000. If your mortgage was completed prior to December 15th, 2017, you are grandfathered in so this will mainly affect those who purchased a home through a home mortgage after December 15th.

In most markets, this change will only affect the luxury real estate niche because the luxury niche is typically where homes of this value fall. Here in the North Kansas City and St. Joseph, MO real estate market, the median listing price is $80,000 so only a very small percentage of our population will be affected by this change. Of course, if you're a cash buyer, it makes no difference at all.

According to President Trump, this change will provide more expendable income for the majority of Americans, creating a business boom. Many, however, are skeptical. Time will tell.

Want to read more about the Tax Cuts and Jobs Act? Check out these artlcles:
Tax bill 101: What the new law means for homeowners
Trump's Tax Plan and How It Affects You
How the Tax Cuts and Jobs Act impacts U.S. tax returns