As the new changes in the Tax plan have been signed into law, speculations about the bill are over. However, interpreting it for all practical purposes has now begun. Existing house-owners, and especially those who are looking to buy new homes, could be affected by the new changes. The new rules, which are not very different from the predictions made by the experts, are as follows:
- The interest paid on loans for vacation homes is no longer deductible.
- $10,000 is the new deduction limit for the combined taxes that include the property tax, income tax, state and local tax.
- Deduction limits for mortgage interest have been decreased from $1 million to $750,000 of debt on the primary residence purchased after December 15, 2018.
Experts believe that these alterations could make the taxpayers pay a higher price for their new homes. Discussed are some of the observations about the impact of the new law on the housing industry.
Impact on Demand-Supply
The Tax legislation could make the net after-tax housing costs to go up for existing home-owners, which could make renting a viable option for those in the process of buying a new home. Subsequently, with a direct impact on the demand, the supply could go down, and for those who are still want to go with the idea of purchasing a house, the options may dry up.
Impetus on Location
The impact of the overhaul on an individual’s tax burden usually depends on various aspects. They include the location of the house, cost of the real estate, other expenses; and even the discounts, if possible. These factors would directly or indirectly have a say in the overall tax burden.
However, the location of the house could be highly important. Previously, the mortgage interest tax deduction apparently benefited those who lived in states or localities with higher income and property taxes. Now with the new rules, homeowners who are bearing the combination of high housing prices and taxes may not like going for the itemized claim on their deductions.
Impact on Mortgage Rates
Homes purchase between December 14, 2017, and 2026 would lead to a deduction on interest up to $750,000 in mortgage debt. However, mortgage transactions on or before December 14th will be able to deduct interest on up to $1 million in debt, as was possible earlier. It’s important to note that previously, interest on up to $100,000 in home equity debt was also deductible.
However, as the monetary worth of most existing homes does not exceed $750,000, it may not be a concern after all. However, for those with expensive houses in plush locations, it could be an issue. Also, this could increase the demand for affordable homes.
Changes in State Tax deductions
Previously, all property taxes collected by state and local governments were able to be claimed as an itemized deduction; provided, the homeowners didn’t pay the alternative minimum tax. The new rules limit the deduction, in total, to $10,000, and this applies to both singles and married couples.
The state and local tax (SALT) deduction can be critical, as it is one of largest for homeowners’ after mortgage interest. Especially for those who own a house in states with high property taxes, and a cap on deductions could be a pinch during tax time.
Increase in Standard Deductions
The new law increases the standard deduction to $24,000 for couples filing jointly and $12,000 for individuals, and as you can see, it’s almost doubled. This upsurge will cancel out the benefit of itemizing for many couples, because, their mortgage interest as well as local and state tax deduction together won’t exceed $24,000.
In the end, people have to stay content with the fact that the new law excludes capital gains from the sale of a primary residence. It means, taxpayers selling their home may exclude up to $250,000 of gain from taxation, and this gets doubled for married couples filing the returns together. Earlier, couples with higher-income may not have been able to claim the exemption at all.
On the whole, the new law removes the tax incentive for buying a home, which could be a significant impact on the industry as well as on the notion that home buying is an achievement of a lifetime. Yet, some experts believe that reduced tax benefits would bring down the prices of real estate. If that happens, first-time home buyers could still go ahead with the dream of owning a house.