The Tax Reform Impact on Builders

Tax laws are nobody’s idea of a fun read, but they affect every taxpayer in the country. Small wonder, then, that the impact of the recently passed Tax Cuts and Jobs Act is top of mind with builders, homeowners and home shoppers alike.

Keeping in mind that local laws and a taxpayer’s individual circumstances will change the overhaul’s impact, here are answers to four of the most common questions asked about the tax reform.

1. Overall, does this tax reform increase or decrease homeownership incentives?

The standard deduction has essentially doubled to $12,000 for singles and $24,000 for joint filers, but the change has diminished many of the itemized deductions a homeowner can claim.

So, for people who are thinking about buying a home, the change in how much they can deduct and their decision to itemize deductions might eliminate their incentive to, for example, spend more on a home than they anticipated with the hope of recouping the extra money come tax season.

2. How will the new $10,000 limit on state and local income and property tax (SALT) deductions affect homeowners?

Under the new tax laws, taxpayers who itemize can deduct a combined $10,000 paid in state and local individual income tax, sales tax and property tax (before the reform, the SALT deduction was unlimited). The $10,000 cap is the same for both single and joint filers.

For people who live in high-tax areas — such as New York, New Jersey and California — that $10,000 cap might be significantly less than what they previously itemized. Depending on the value of other deductions like mortgage interest, high-tax areas could see the largest shift away from the itemized deductions and the homeownership benefits provided by the tax code.

3. What impact will the new mortgage interest deduction cap have on current homeowners?

Before the tax reform, homeowners could deduct the mortgage interest paid on loans of up to $1 million. Under the new law, homeowners can only deduct interest on mortgage loans of up to $750,000. For home shoppers in expensive markets, the cost of owning a home might be even higher.

Current homeowners who might be looking for a second home — and already have a $750,000 mortgage — won’t be able to deduct the interest on their second home’s mortgage. But if their current mortgage is less than $750,000, the difference would be deductible. For example, if their primary home’s mortgage loan amount is $550,000, they might be able to deduct the interest on a loan up to $200,000 on the second home.

4. Will changes to deductible interest on home equity loans impact homeownership rates?

Doubtful. Home equity loans are mostly taken out to subsidize the cost of home improvements, so if a homeowner no longer itemizes their deductions and isn’t keen on taking a home equity loan, it might impact the condition of a home more than the ownership of one.

When it comes down to it, a tax bill (or refund) probably won’t be the single deciding factor for most people who are considering homeownership.

Visit the full article on Zillow Research for more answers to common questions about the new tax reform laws, as well as updated information on this ongoing topic.